Do tax cuts spur growth? What we can learn from the Kansas budget crisis

by: PBS NewsHour

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MILES O'BRIEN: Now back to efforts to pass a rewrite of the tax code, and how a major experiment to cut taxes in Kansas has played out. As House and Senate Republicans in Washington work to reconcile their tax bills, some have said the Kansas experiment, while different in many ways, offers some potential lessons. Economics correspondent Paul Solman recently visited the state, part of his weekly series, Making Sense, which airs every Thursday. PAUL SOLMAN: Nine years ago, John Rhoden started his roofing company in Wichita, Kansas. His crews now work on commercial buildings like these. Four years ago, in 2013, businesses like his went from paying well over 6 percent in state taxes to paying nothing at all, part of a plan to boost the limp Kansas economy. JOHN RHODEN, Owner, Rhoden Roofing: Like, we bought a truck, a brand-new truck last year. And not paying those taxes in, that money I'm spending hopefully grows, not just my business, but other businesses in the state. PAUL SOLMAN: In 2012, Republican lawmakers in control of the state government had voted to kill taxes on personal businesses like Rhoden Roofing, and cut income taxes some 25 percent for everyone else. Governor Sam Brownback coined a phrase to describe the purpose. GOV. SAM BROWNBACK (R), Kansas: Eliminating income taxes on small businesses is like a shot of adrenaline straight into the heart. It will jolt our state and give us dynamic growth. PAUL SOLMAN: But skeptics wondered what other cuts would be needed. Here's Willie Geist interviewing the governor on MSNBC's "Morning Joe": WILLIE GEIST, MSNBC: This included cuts on education and social services, which is where some people took exception. GOV. SAM BROWNBACK: Not so on the last part of that. WILLIE GEIST: No cuts on education? GOV. SAM BROWNBACK: No. WILLIE GEIST: Or social services? GOV. SAM BROWNBACK: No. PAUL SOLMAN: No cuts at all. But how could that be? How could the state cut taxes, while providing the same level of government services? GOV. SAM BROWNBACK: Growing the economy will create jobs. And more jobs mean more Kansans working, and more Kansans working produces more revenue for the state to fund our important services that we have. DUANE GOOSSEN, Former Kansas Budget Director: Immediately, when the tax cuts were put in place, our revenue dropped like a rock. PAUL SOLMAN: Duane Goossen is a former Republican state legislator who served 12 years as budget director for three Kansas governors, Republican and Democrat. DUANE GOOSSEN: Income tax revenue, which was the main source of income for our state general fund, dropped about $700 million, or about 25 percent. PAUL SOLMAN: But isn't the idea here that, in the long run, inviting businesses in or businesses that are already here to expand will pay off, and you're just looking at it too shortsightedly? DUANE GOOSSEN: Even if that were true, Kansas didn't have the long run to do this experiment and be successful. We immediately went into a budget crisis. PAUL SOLMAN: To cover the gap, lawmakers first siphoned money from the state's rainy day fund, then went after transportation funding. But it still wasn't enough. MAN: Kansas school districts scrambling to find ways to make up funding. MAN: The Centers for Medicare and Medicaid services has decertified Osawatomie State Hospital. WOMAN: State lawmakers are now questioning how 70 foster kids can go missing. PAUL SOLMAN: That was the local news soundtrack in Kansas from 2014 on, while lawmakers went through budget cut after budget cut. MELISSA ROOKER (R), Kansas State Representative: I'm all for making sure our state government operates very efficiently, but I think you cut past the point of efficiency when you cut too deeply. PAUL SOLMAN: Melissa Rooker, Republican state rep from suburban Kansas City. MELISSA ROOKER: I often get asked how, as a Republican, I could be against these tax cuts. All I can say is, I am a Republican, I am fairly conservative in my approach to money management, and this didn't feel comfortable. The proponents of the plan will tell you today that we should have given it more time, that we didn't cut the budget enough. And I will tell you, we cut it nine times to try and cope with the drastic revenue reduction. TY MASTERSON (R), Kansas State Senator: I wish I could've had a stronger influence on my colleagues and have trimmed the growth of government even further. PAUL SOLMAN: Republican state Senator Ty Masterson represents a district near Wichita, runs this maker space called GoCreate funded by the far-right Koch Foundation. He says lawmakers simply weren't willing to go far enough. TY MASTERSON: We were still anticipating more growth, and we didn't keep the government in check in the out-years. PAUL SOLMAN: Do you take any personal responsibility for that? TY MASTERSON: Sure. I was actually -- I was chairman of Ways and Means in those next four years, where we were anticipating more revenues. Well, then the revenue estimates were wrong. And they were short. And the national economy was only growing by 1 percent. So I do take some personal responsibility. PAUL SOLMAN: But, for most Kansans, say Goossen and Rooker, the spending cuts went too far, particularly those to education, which made the cuts seem especially unfair. That's because Kansas schools are funded through both the state income tax and local property taxes. Even before the tax cuts went into effect, Kansas' Supreme Court had ruled that the state's schools were unconstitutionally underfunded. The income tax cuts set poorer schools back even further, schools like Wyandotte in Kansas city. With so many non-English speakers, the bathrooms are labeled in English, Spanish, Burmese, Nepalese and Hmong. Eighty percent of the kids need support for lunch. Jason Drew teaches government. Drew grew up and attended school nearby, returned after his B.A. at USC. He could make $5,000 a year more just by teaching in the wealthier county next door. JASON DREW, Teacher: But I have known teachers who have left our district and gone to a district in Johnson County because they're going to pay their teachers more or because that school has more resources and has more funding. PAUL SOLMAN: Says Senator Rooker: MELISSA ROOKER: What has always been a draw for Kansas is the quality of life, the stability here, excellence of our public school system. By cutting into those basics, we really have shot ourselves in the foot. PAUL SOLMAN: Meanwhile, roofer John Rhoden was watching the news about the cuts. JOHN RHODEN: As a citizen of the state, and you're seeing that schools may not being funded to the level that they need to be, you know, you do look in the mirror and say, I'm not paying any state taxes. Should I be? And you kind of have that guilt. PAUL SOLMAN: OK, so much for revenue cuts. What about that shot of adrenaline? Former Budget Director Goossen: DUANE GOOSSEN: The Kansas economy grew in a meager way, but in comparison to our surrounding states and in comparison to the national average, we underperformed. So, if anything, our tax cuts correlate to economic decline or economic stagnation, rather than any kind of an economic pop. PAUL SOLMAN: In 2016, when Kansans went for Donald Trump, they also replaced one-third of their legislators with moderate Republicans and Democrats. Once in office, those legislators largely undid the tax cuts, overriding Governor Brownback's veto. The electorate had changed its mind, says Goossen. DUANE GOOSSEN: Every month, every year, coming out of Topeka was the news that the budget was in trouble, that revenue wasn't living up to projections, that programs had to be cut back. TY MASTERSON: The general public, in my opinion, had a major misconception of the truth, which affected then the ballot box. PAUL SOLMAN: The public was conned? TY MASTERSON: I think to a large degree. I don't want to -- I say conned -- they were... PAUL SOLMAN: Misled. Misled. TY MASTERSON: I think misled. PAUL SOLMAN: And is his fellow Republican Senator Melissa Rooker also misled? TY MASTERSON: In my opinion, she's extreme left. There's no difference between her ideologically than the most left Democrat, who would obviously see me as extreme. PAUL SOLMAN: Well, if Melissa Rooker is extreme left, what do you make of Bernie Sanders or Donna Brazile? TY MASTERSON: They're all there together. PAUL SOLMAN: So, there's no difference between... TY MASTERSON: There's less difference between her and Bernie Sanders than there is between her and I. PAUL SOLMAN: Masterson insists that the extreme left and the media have given the Kansas experiment a bum rap. He says state unemployment has continued to fall, that the crash of oil, gas and farm prices explain the slow overall growth. TY MASTERSON: It amazes me that there's so much focus on Kansas. It almost feels to me like it's the rabbit in the hat and the curtain. PAUL SOLMAN: The reason people are using Kansas is because this argument, as you well know, has been raging for decades. When you cut taxes, do you stimulate growth or do you not invest in things that will cause greater growth in the long run, infrastructure, education, and so forth? TY MASTERSON: That's fair. And what I'm trying to point out is that is an assumption of all things aside, right, of all things being equal, which clearly we know they're not always equal. And I'm trying to point out those unequal things. PAUL SOLMAN: True, but then how could you ever tell if tax cuts, or any policies, work? Masterson had one more argument, though: Shrink government, what has been called starving the beast. TY MASTERSON: I would say it's more like bariatric surgery, and we're limiting its revenues, so, instead of being morbidly obese, we're just simply overweight. PAUL SOLMAN: Representative Rooker uses a different anatomical metaphor: They have cut to the bone, or even the marrow. MELISSA ROOKER: This is what smaller government looks like in action. Is this what you want? PAUL SOLMAN: From Wichita, Kansas, this is economics correspondent Paul Solman reporting

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Four years ago, businesses in Kansas went from paying over 6 percent taxes to paying nothing at all, as part of a Republican experiment to boost the limp state economy. But when the massive drop in tax revenue destabilized the economy lawmakers started slashing the budget and social programs and underfunding schools. Economics correspondent Paul Solman reports on what happened next.
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