About ten years ago, the state of Kansas enacted one of the largest income tax cuts in that state’s history. It came after vigorous efforts by Kansas’ governor at the time, Sam Brownback. He compared his tax policies with those of Ronald Reagan and predicted that the cuts would be a “shot of adrenaline into the heart of the Kansas economy.”
Since the 2012 tax cut, however, Kansas’s economy lagged neighboring states. Lawmakers were forced to make huge cuts in vital programs such as Medicaid, education, welfare, court funding, and infrastructure. In 2017, after slow growth and two downgrades of Kansas’ bond ratings, the state’s Supreme Court ordered that Kansas increase education spending. And the state legislature reversed much of Brownback’s original tax cut, overriding Brownback’s veto to do it.
In all, the Kansas Experiment, as it was called, was a dismal failure. Forbes said that “the Kansas template for that approach has crashed and burned.” It’s easy to wonder whether similar efforts to cut taxes would be similarly doomed.
One feature of the Kansas experiment that is sometimes overlooked, however, is that the Brownback bill included offsets. It would have increased the state sales tax and would have eliminated many tax credits and deductions. The legislature, predictably, tossed out the offsets and sent the bill with only the tax cuts to Brownback’s desk, expecting trickle-down economics and similar theories to make the cuts pay for themselves and then some. But the effect was like pointing a plane’s nose directly at the ground and telling its pilot to land safely. It’s possible to do it, perhaps, but it takes a lot more work than landing the plane when starting with its nose pointing toward the horizon.
In a recent article, the national Tax Foundation pointed out that since 2012, 25 states have lower income tax rates while four (and the District of Columbia) have higher rates. (Hawaii was one of the 21 other states that kept its income tax rates the same.) We aren’t hearing crash-and-burn stories from the other jurisdictions. Actually, the opposite is true. As the Tax Foundation observed:
The expectation is that states which cut income taxes raised less than without a rate cut—that was, after all, kind of the point. But it’s impossible to look at the data and see this broad tax-cutting trend as reckless when the 25 states that cut taxes have seen more revenue growth than the five jurisdictions which raised them—driven, no doubt, at least in part by the fact that the tax-cutting states saw 70 percent more population growth than the handful of tax-raisers.
States adopted these tax cuts at different times in the past decade, of course, meaning that neither the economic effects nor the revenue reductions were experienced for identical periods of time, and the cuts varied dramatically in size. Nevertheless, it’s instructive to note that all but one of the 25 states that cut taxes since Kansas have larger budgets, in inflation-adjusted terms, than back then. The outlier is North Dakota, where plummeting oil revenues in FY 2021 (since recovered) caused the state to end the period lower. Tax cuts haven’t starved governments of funding; they’ve involved lawmakers making a conscious choice to return a portion of the state’s revenue gains to taxpayers in the interest of greater tax and economic competitiveness.
Here in Hawaii, we have a tax and economic competitiveness problem. The problem is evidenced by census numbers and numerous first-hand accounts of folks who simply can’t make ends meet here and felt they had to jump on a plane with a one-way ticket.
Can we get back to economic competitiveness by lowering our massive tax rates a bit? Twenty-four states did so and seem to have come out okay. One state crashed and burned, but we can certainly learn from its mistakes.