Kansas will have a year to learn whether huge tax cuts will produce equally huge economic growth.
The Legislature passed a budget Sunday and went home, leaving what has been labeled a “nuclear option” tax cut bill in Gov. Sam Brownback’s hands. The governor said last week he would sign it if lawmakers didn’t pass a milder tax reform version that he also supported. They didn’t. So the bill that Legislative Research estimates will cause a huge deficit by 2018 is due to be signed and go into effect.
The measure would cut individual income tax rates and eliminate income taxes for 191,000 businesses. In addition, the state income tax rate is scheduled to drop from the current 6.3 percent to 5.7 percent.
Tax revenues won’t begin to shrink until 2014, so the 2013 budget is still expected to show a $464 million surplus at the end of June 2013.
As a result, there will be a year’s grace before the result of this year’s risky experiment will become apparent.
The theory on which Gov. Brownback and his radical fellow travelers in the House are depending on is that Kansas businesses will thrive — and state revenues will grow — in response to the tax reductions. If the theory holds water, state revenues should grow much faster in Kansas, starting immediately, than economic activity will accelerate in the nation as a whole or in the states surrounding Kansas.
Cutting taxes will accelerate economic growth, it is posited, because employers will hire more workers and pay them higher wages when they can anticipate greater profits. Business profits will rise as a consequence of the tax cuts.
Those who question this chain of events, say that businesses don’t automatically grow when taxes are cut. Demand for goods and services must increase before businesses can expand, they say. But, the tax-cutters respond, when taxes are cut, people have more money to spend and demand for goods and services will increase.
Both of these arguments are accepted by professional economists, but few of them are brave (or foolhardy) enough to predict just how much economic growth will be created for each million dollars in tax revenue forfeited through rate reductions.
In Kansas, politicians rush in where economists fear to tread.
The economists in the Kansas Legislative Research department predict state revenues will fall by over $200 million in 2014 and the annual deficit will rise to $2.5 billion by July 2018 if the reductions Gov. Brownback is slated to authorize today remain unaltered.
NEEDLESS TO SAY, Kansas won’t run a $2.5 billion deficit in 2018. It can’t, under the cash basis law. Taxes will be increased somewhere short of that death-of-Kansas projection.
It is also true, however, that a great deal of damage to our beloved state and its people can be done before clear thinking returns. If supply-side economics fails to live up to its glowing promises and cutting taxes doesn’t produce the promised miracle. If slashing taxes winds up reducing state revenues — as two-plus-two-equals-four math suggests it might — then education in Kansas, along with health care for those with low incomes, will take the heaviest blows, because that’s how the state spends most of its money.
The children in the public schools and the young men and women in our two-year colleges and degree-granting universities will be the biggest losers if the gamble that Gov. Brownback and the House radicals are making falls flat. Label this picture grossly unfair.
