Politics & Policy

Kansas Tries to Shrink Its Way to Prosperity


Kansas Tries to Shrink Its Way to Prosperity

Illustrations by 731; Photograph by Karen Crowe/Getty Images

Sam Brownback has been a Tea Partier since before the Tea Party was born. When he became governor of Kansas in 2011, he set about making the state a testing ground for conservative principles, including cutting funding for some public education and the eventual elimination of the state’s income tax. “Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy,” he wrote in a 2012 op-ed. He predicted cutting taxes would “pave the way to the creation of tens of thousands of new jobs, bring tens of thousands of people to Kansas, and help make our state the best place in America to start and grow a small business.”

The Kansas experiment attracted the attention of both conservatives and liberals around the country, who saw it as an acid test for the Tea Party agenda. Brownback, a former U.S. senator who briefly ran for president in 2007, crept up the long list of dark horse candidates for the 2016 Republican nomination.
 
A little more than a year has passed since the first phase of the Brownback tax cuts went into effect on Jan. 1, 2013, so it’s possible to make a preliminary assessment of their effects. The early verdict: not too good. The jury is still out on whether lower taxes will stimulate businesses to expand and hire over the long term. But the immediate effect has been to blow a hole in the state’s finances without noticeable economic growth.

In Kansas, one of the nation’s reddest states, the relevant political split isn’t between Republicans and Democrats but between conservative Republicans and somewhat more moderate ones. National Journal recently ranked Kansas’s four-member congressional delegation the most right-leaning in the country. That describes Brownback, too. A convert to Catholicism from evangelical Protestantism, he is as conservative socially as he is fiscally, opposing abortion and same-sex marriage. His campaigns have long been supported by billionaires Charles and David Koch, the conservative majority owners of Koch Industries, based in Wichita.

The state income tax cut that Brownback signed in 2012 was the nation’s biggest, in percentage terms, since the 1990s. That was a very different era, when states were able to cut taxes steeply because boom times had left their coffers overflowing. Brownback made his cuts in the face of economic weakness, not strength. The first phase reduced the top rate from 6.45 percent to 4.9 percent while immediately eliminating income tax on business profits from partnerships and limited liability corporations that are passed through to individuals. A 2013 measure put the income tax top rate on track to decline to 3.9 percent by 2018.

The most authoritative study of the effect of these measures is a January report by the Kansas Legislative Research Department, a nonpartisan arm of the legislature. It found that revenue isn’t keeping up with expenses even after cuts in spending on K-12 schools, colleges, libraries, local health departments, courts, and welfare. If nothing changed, the research department’s numbers show, the state’s general fund would have a shortfall of about $900 million by fiscal year 2019, or 14 percent of expenses that year. The state’s constitution requires a balanced budget, so either taxes will have to go back up or spending will have to come down even more. “The tax cuts don’t pay for themselves,” says Duane Goossen, who served as state budget director under both Republican and Democratic governors. “That just is not happening.”

The budget picture has actually darkened since the release of the research department’s January report. In March, the Kansas Supreme Court ruled that cuts to aid programs that close the gap between rich and poor students violated the state constitution. That wasn’t all Brownback’s fault: The cuts began under his Democratic predecessors, Kathleen Sebelius and Mark Parkinson, who were scrambling to balance the state budget during and immediately after the 2007-09 recession. But instead of reversing the cuts as the economy healed, Brownback deepened them. Per-pupil state aid this school year is $3,838, down from $4,400 in 2008-09. The high court’s decision came 60 years after another landmark schools case involving Kansas: Brown v. Board of Education, in which the U.S. Supreme Court ruled that “separate educational facilities are inherently unequal.”

This month the state legislature added almost $130 million a year in K-12 school funding to address the state Supreme Court’s finding that students in poor districts were being cheated. The justices also instructed the trial court to reconsider a different question raised in the case: whether school funding overall is simply too low. A ruling against the state on that issue could force the legislature to approve hundreds of millions of dollars in additional education spending, further ballooning the state’s expenses—and jeopardizing Brownback’s tax-cutting legacy.

Republican governors looking to Brownback for ideas to copy don’t have much to latch on to. Employment is rising, but no faster than in neighboring states. Applebee’s International (DIN) moved its headquarters from Kansas to Missouri shortly after Brownback took office. In 2012, Boeing (BA) said it would close its historic Wichita plant, costing more than 2,000 jobs. In 2013, the first year the cuts were in effect, pretax personal income growth in Kansas was lower than in neighboring Oklahoma, Colorado, Nebraska, and Iowa, and about the same as in Missouri.

Brownback spokeswoman Sara Belfry says, “We have increased funding to K-12 every year we have been in office,” and produces charts showing steady increases in the number of teachers. True on both counts. The funding increase didn’t directly benefit students, however: It was mostly due to catch-up contributions to the teachers’ pension fund and required payments to school districts issuing construction bonds. While the number of teachers is slowly rising, it’s still below where it was before the recession, according to Kansas Education Department data.

Voters aren’t impressed. Only a third of Kansans approved of Brownback’s job performance in a February poll by Public Policy Polling. Running for reelection this year, he’s in a statistical dead heat with his main Democratic challenger, House Minority Leader Paul Davis. “The governor is championing a red state model, and it’s truly not working,” Davis says.

Brownback’s supporters see bright spots. Art Hall, executive director of the Center for Applied Economics at the University of Kansas School of Business, notes a surge in business registrations and says, “It definitely looks like more people are trying to get in the game.” On the other hand, he says there’s anecdotal evidence that some people rushed to set up businesses because they mistakenly thought they had to in order to qualify for certain Brownback tax cuts. Hall is a former Koch Industries economist who served as an unpaid efficiency analyst for former Democratic Governor Sebelius. He applauds Brownback’s emphasis on spending cuts: “You could cut a lot of money out of the budget and keep everything whole if you really put your mind to it.”

That kind of cutting isn’t painless. Rising Medicaid rolls, court-ordered school spending, and simple inflation will tend to cause spending to rise, not fall, in the years ahead. The question is whether Brownback will still be in office to try to keep that from happening.

The bottom line: In Kansas, income growth is lower than neighboring states’ despite—or because of—steep tax and budget cuts.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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