Kansas and the myth of trickle-down tax cuts

December 24th, 2016 at 11:52 am

I know, you’re busy wrapping presents and such, but allow me to intrude for a brief second to make sure you saw this WSJ piece about the ongoing supply-side tax cut experiment in Kansas. This is important not just because it’s a microcosm of the Trump tax plan, designed, in fact, by some of the same dubious characters, but because of a particularly unfortunate aspect of the Kansas cuts that the trickle-downers are trying to bring to the nation: big carve-outs for pass-through income.

See the text box here for specifics of the tax changes, but back in 2012, Gov. Brownback was persuaded by some of the same folks now advising Trump to sharply cut state income taxes and to fully exempt pass-through income (income from a business that you pass-through to your personal income tax).

As the WSJ piece and much other analysis shows, not only did the growth that was supposed to offset the revenue losses fail to appear, but the Kansas economy appears to be doing notably worse than it was before the cuts. The budget’s in trouble and the state’s bond rating has been downgraded.

Needless to say, this reality has had almost no perceptible impact on the cuts’ architects. As soon as I and every other tax wonk heard about the pass-through exemption, we concluded that the incentive to restructure as a pass-through entity would be irresistible. The WSJ piece points out that the number of entities taking advantage of this new loophole turned out to be 70 percent above the state’s projections.

Steve Moore, a key trickler that pushed the plan in Kansas, didn’t see that coming:

“Sometimes it was legitimate, and sometimes it was a gaming of the tax system to pay the zero rate, so that loophole has to be closed,” he said.  “Unless you have some rules about this, people really will shift income and they’ll find ways to legally avoid paying tax, and that was never the intention.”

Who’d a thunk it?

Moore is now a Trump adviser, and while pass-through income isn’t zeroed out in the Trump plan, it is taxed at very favorable 15 percent rate.

This isn’t complicated, folks. In fact, it’s my first rule of tax avoidance: if there’s a type of income that’s privileged under the code, any putz with a tax lawyer suddenly discovers—who knew?—that’s the very type of income he or she had all along.

The WSJ includes a figure showing how job growth in Kansas is trailing the nation, but a more convincing comparison is job growth in Kansas compared to surrounding states. Regional economic conditions pose a better control than national conditions.

The first figure shows year-over-year job growth in Kansas, its four surrounding states (CO, MO, OK, and NE), and the nation. Sure enough, around the time of the tax cuts, Kansas starts drifting below the pack in terms of employment growth.

Source: BLS

Source: BLS

More recently, the control states’ line falls a bit too. This is driven wholly by Oklahoma which, of all these states, is most dependent on oil extraction, and the crash in the price of oil quickly whacked the OK job market (Kansas is much less dependent on energy jobs). That’s a good reminder of the sort of thing that actually moves the job market, versus the fairy dust claims of the trickle-downers.

Here’s another way of showing the same thing. Suppose you tried to predict state job growth using just national job growth and a trend term. You’d get a decent fit, but to be clear, this is of course not a detailed, causal model, just a correlation exercise. So I ran such a model on Kansas, stopping the estimate in 2012. Then I forecast job growth after that based on actual, national data.

Sources: BLS, my calculations.

Sources: BLS, my calculations.

National job growth handily tracks that of KA up until around when the tax cuts hit the scene. After that, the prediction consistently surpasses the actual. It’s just another simple way of showing that something happened around then that hurt the state’s employment record, and we all know the prime suspect.

But if facts could kill the trickle-down tax cut myth, it would be long dead. I harbor no illusions: there is no other economic policy I can think of that is both so actively pursued yet so clearly wrong.

OK, I promise not to bother you again until after the holiday. I’m tempted to offer you seasonally adjusted greetings, but that would be no greetings at all! (Not sure if that’s a “dad” joke or a nerd joke–pretty sure it’s the intersection of both.)

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15 comments in reply to "Kansas and the myth of trickle-down tax cuts"

  1. Robert Salzberg says:

    JB writes:

    ” there is no other economic policy I can think of that is both so actively pursued yet so clearly wrong.”

    How about expansionary austerity which has devastated the EU and slowed growth in the U.S.?

    Or the No New Taxes ideology among Republicans?

    Or thinking the Free Market is better at saving money in health care than cost controls by the government?

    • Jared Bernstein says:

      Hmmm…update: “this is one of numerous economic policies that are both actively pursued yet clearly wrong!”

  2. Smith says:

    The example is invalid. There is a huge difference in the Kansas experiment. They are required to balance the budget. The federal government is not. The U.S. government can run a huge deficit. That is what Reagan did with his military buildup and tax cuts. Trump can do it more easily because he’s starting out with a less than 2% inflation rate, a weak labor market and plenty of slack in the economy. If he does try to balance the budget, there could be a problem similar to Kansas. The Democrats will stop deep cuts and Republicans will blame them for rising debt. The economy may still boom while government functions rot from within.

    • Robert Salzberg says:

      Kansas is required to balance their budget only due to a self imposed, stupid restriction. Sure, the federal government can more easily run deficits, but so can the states if they want to.

    • Matt says:

      Note that Kansas has ‘balanced’ its budget through drawing down reserve funds, principally it’s highway reserve, and the deferral of mandated contributions to the state employees’ retirement fund. These options are quickly being depleted and the real impact of the budget cuts on state services will soon be known.

    • Karen says:

      Kansas didn’t balance their budget. They are in the whole millions of dollars. They have stripped all highway money, education money, and anything else they can get their hands on to get the budget balanced, but with no money coming in, there is nothing to pay for anything. I am from Kansas and Brownback is inept. The previous governors of Kansas, both Republican and Democratic tried to tell him what needs to happen, and Brownback just continues doing his best to take Kansas down the toilet. He has done an excellent job!

  3. Smith says:

    My point is Reagan, and to a lesser extent the second Bush, proved you can have a growing economy with massive regressive tax cuts. There was an eight year run of expansion following the massive Reagan recession 1980 and 1981- 1982 until trouble came in the first Bush presidency. An oil spike didn’t help matters. Likewise the second Bush presidency managed six years following the very mild 2001 recession until everything blew up. The 2007 – 2009 was not the result of the tax cuts, but instead followed massive fraud in credit markets aided by deregulation begun in the Clinton administration.
    Liberal economists predicting economic calamity are not helping the progressive cause. Instead they may discredit themselves and progressive causes by predicting an outcome which is highly uncertain and unsupported by recent economic history.

    • TH says:

      The outcome predicted is that tax cuts do not drive above-average economic growth. What in recent history does not support that?

    • Kaleberg says:

      There were two other recessions during the Reagan years. His Keynesian spending plan just wasn’t enough to overcome the tax cuts.

    • Karen says:

      Wrong!! If you look honestly into the Reagan presidency, his tax cuts almost took the nation down the crapper until the Federal reserve stepped in. Reagan’s tax cuts caused high interest rates, high loss of jobs, and his administration took away tax cuts for the working class, averaging income over a 3 year period, interest rates on credit cards, etc. that the wealthy kept.
      Reagan began reducing military, we were in the military at that time, early outs, and got out into an economy that had no jobs, and very few hopes for jobs.
      Every economist shows that the Democrats have far better economies than the Republicans. In most cases, the Democrats have to clean up what the Republicans messed up.

    • Think Mann says:

      Under Reagan and under Bush II, seven years in to their presidencies we had a massive recession and housing crashed, foreclosures rose. In 1987 it was the Savings and Loans the lead the crash due to deregulations that resulted in bad loan policies by the S & Ls. In 2007 the crash was lead by the big banks due to bad loans bundled into worthless, unregulated securities. Yet under Clinton the economy boomed. Under Obama the economy boomed. Of course the GOP propagandists sold a different story that clashed with reality and the actual economic data.

  4. dilbert dogbert says:

    Seems you have been following Menzie Chinn
    Menzie has been singing this song for a number of years.
    You two could make a duet.

  5. Douglas says:

    So what is the Republican end game. I can sort of understand the Repugnant Parties disinterest in supporting education because they probably realize that every third grader with half a brain is planning on leaving the state and therefore wasting all the state’s money. But if you ruin the roads, ruin education and everything else you can get your hands on then what is next? Hope you have chased out all the riff-raff and thousands of billionaires will show up in Kansas so they can sit on their back porch and watch the subsidized wheat wave in the wind?

    • Berto says:

      “So what is the Republican end game.”

      Same as it’s been since Reagan:
      1) Cut revenues and hand the Treasury to corporations and the rich.
      2) Cry about the “out of control” and “unsustainable” deficit (they created).
      3) Raise taxes on “everybody” (corporations and the rich got the cuts, but now everyone–the working class—has to bail them out), and shred the social safety net, because we can no longer afford it.
      4) Lather, rinse, repeat.