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We’re all in Kansas now

Amidst all the weird things that happened on Wednesday, one of the low-key weirdest was Kansas Gov. Sam Brownback popping up on Capitol Hill to help lobby for the GOP tax bill, arguing that Republican senators should see it as an effort to replicate the ideas he's implemented at the state level because, after all, "What we did actually worked."

Now if you'd told me a couple of days ago, "Republicans just want to imitate Kansas's failed tax policies," then I'd have told you that was a bit of a hackish and unfair response.

After all, state and federal tax policy issues are significantly different along a couple of different important dimensions. And the Senate GOP plan isn't actually nearly as radical as what Brownback implemented in Kansas.

But if Republicans themselves are going to invite the comparison, then it does seem like it'd be worth looking under the hood. And the basic outlines are pretty clear:

  • Led by Brownback, Kansas Republicans enacted sweeping tax cuts that included the then-new idea of creating new special tax breaks for closely held "pass-through" business entities.
  • Skeptics said cutting taxes that much would blow a huge hole in Kansas's state finances and cause lots of secondary wreckage.
  • Proponents said it would unleash so much growth that revenue would soar.
  • The skeptics were right and the proponents were wrong.

Today in Kansas, Brownback has a 24 percent approval rating (next door in Nebraska, Pete Ricketts is at 56 percent) and over the summer a bipartisan coalition in the legislature overrode Brownback's veto to raise taxes. Nevertheless, the Kansas Center for Economic Growth reports that state government financial assistance to local government entities is down 14 percent since 2009, leading to cuts ranging from a 31 percent cut in library funding to a 1.8 percent cut in public safety funding.

To say that drastic tax cuts lead to steep reductions in tax revenue, thus necessitating sharp cutbacks in public services, doesn't seem like an earth-shattering policy conclusion. But this was very much at issue when Brownback proposed his cuts. And it continues to be at issue in the Republican tax plan, since GOP leaders purport to believe that you can enact a large tax cut for business owners and heirs to large estates without making people who don't own businesses or inherit large estates any worse off, thanks to the magic of growth.

Kansas's economy, to be clear, is certainly in okay shape, with an unemployment rate that's below the national average. But there's zero evidence that growth there has been "supercharged" — unemployment growth in Kansas lags behind all the other Great Plains states, and GDP growth does too.

The effect of cutting taxes on rich people and business owners has been to increase the after-tax income of rich people and business owners, while leaving the state strapped for cash to pay for public services.

Indeed, William Gale at the Brookings Institution notes that rather than growth inducing less revenue loss than conventional forecasts expected, the opposite happened: Pass-through shenanigans created more tax avoidance than conventional models expected, leading to lower-than-expected revenue. In many ways, I think this is Kansas's most important lesson for federal tax policy. The somewhat slapdash way that the final legislative text is being assembled raises the question of whether we really understand the scale of the new loopholes being created or how much revenue we are going to lose.

In related news, Marco Rubio spoke Wednesday at a panel sponsored by the Financial Services Institute and concluded that cutting taxes is just the first step in a process that will need to include cuts to Social Security and Medicare.

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