'You Better Learn Our Lesson'

The regretful Republicans of Kansas have a message for the tax-cutting Republicans of Congress: Don’t follow our lead.

If states are, as Justice Louis Brandeis famously called them, the laboratories of democracy, then Kansas’s experiment in conservative tax reform set off an explosion of red ink. Steep cuts for businesses and individuals failed to produce a promised economic boom, and busted the state’s budget instead. Now, the GOP legislators that oversaw—and ultimately cancelled—that fiscal study are increasingly worried that Washington will ignore its central finding.

A tax-reform plan from the White House and Republican congressional leaders mirrors the structure of the legislation Kansas passed, and it’s been accompanied by the same confident assurances that it will “pay for itself” with economic growth. “That won’t work, so you better learn our lesson,” warned Kansas state Senator Barbara Bollier, a Republican who voted against the tax cuts originally and then fought to undo them earlier this year.

At the behest of conservative Governor Sam Brownback, Republican majorities in Kansas in 2012 set the state’s income tax on a “march to zero” and eliminated taxes on companies whose owners filed their taxes as individuals—a loophole exploited by thousands of businesses that resulted in plummeting revenue to the state’s coffers. Brownback, a former U.S. senator and presidential candidate, hailed the policy as “a real-live experiment” in conservative governance. But in the eyes of all but Brownback and his staunchest supporters, the test failed. Economic growth never materialized, and the state legislature could not summon the political will or overcome legal roadblocks to cut spending to match the lower revenue. With annual deficits in the hundreds of millions, Kansas has been mired in a perpetual budget crisis ever since.

“It was supposed to increase the GDP, and it didn’t. The feds will have that same problem,” said state Senator Jim Denning, a conservative who originally supported the tax cuts. In a phone interview, Denning told me he had done his own economic modeling in 2012 and “proved to myself that the tax cut would work.” But the new policy did not prevent a rural recession in Kansas or a dip in its oil-and-gas business. “It generated hardly any measurable economic activity,” Denning said. By the beginning of this year, he had changed course and voted along with Democrats and a coalition of Republicans to reverse most of the cuts, erasing Brownback’s economic legacy. (The governor won’t be in office much longer: He has accepted a diplomatic post in the Trump administration and will resign once he’s confirmed by the Senate.)

Bollier recalled that Republicans had first tried to offset the steep cuts in tax rates by eliminating deductions and exemptions in the Kansas code. But those proposals could not get through the legislature, exacerbating the resulting increase in the state’s budget gap. “You’ve got to have pay-fors. You can’t do it just by cutting taxes,” she concluded.

A similar debate is now playing out in Congress. Republican leaders, led by House Speaker Paul Ryan, wanted to raise as much as $1 trillion in revenue over a decade by instituting a border-adjustment tax, which would help pay for a reduction in tax rates for individuals and businesses. But conservatives rebelled, forcing Ryan to abandon the idea. The same fate could befall a proposal to raise more than $1 trillion by eliminating the state and local tax deduction, which is facing opposition from Republicans in high-tax states like New York, New Jersey, and California. Suggestions to pair tax cuts with reductions in spending on Medicare, Medicaid, and welfare programs are likely to go nowhere, too.

If Republicans in Washington can pass anything at all, it is likely to be a straight, temporary tax cut that adds to the deficit, which is easier for Congress to do because the federal government, unlike states, does not have to balance its budget. “That, to me, is a very poor decision,” Bollier said.

Kansas Republicans do credit the national GOP for proposing more modest tax cuts than they ultimately enacted. The congressional plan calls for a one-time reduction in income taxes, while Brownback signed a law that set automatic decreases with the ultimate goal of eliminating the state income tax entirely. Kansas’s slashing of the rate for so-called “pass-through” entities, designed to bolster hiring at mom-and-pop businesses, proved to be even more of a budget buster. Nearly 400,000 businesses took advantage of the exemption, reducing the state’s annual tax revenue by between $200 million and $300 million, according to the nonpartisan Tax Foundation.

Republicans in Congress want to cut taxes for pass-through entities, too, but not by nearly as much. They have proposed lowering the cap on those companies to 25 percent, compared with the current top rate of 39.6 percent. Denning said the federal plan looks “way more responsible” than what Kansas did in virtually eliminating taxes on many small businesses.

It is that distinction that members of the Kansas congressional delegation have cited in defending the GOP tax plan. “While some may try to compare this tax-reform framework to what was tried in Kansas, the truth is these two reforms could not be more different,” Representative Lynn Jenkins, who sits on the tax-writing Ways and Means Committee, said in a statement.

But the concerns of Kansas state legislators go beyond the pass-through policy. They worry that Republicans in Congress, including those in the state’s own delegation, are basing their tax overhaul on the same underlying assumptions about economic growth that have been articles of faith for the party since the Reagan era but turned out disastrously in Kansas. “This is designed to shrink government. It is not designed to grow business,” state Representative Stephanie Clayton told me. “I’ve seen it. It shrinks government. It doesn’t grow business.”

She alleged that Kansas’s representatives and senators in Washington had shown no interest in learning about the state’s experience and were simply following the orders of the Koch brothers, the powerful GOP donors headquartered in the state. “They don’t think anything’s wrong with it, but then again, none of them actually live in Kansas anymore, so what do they know?” Clayton said of the delegation. (None of the members of the Kansas congressional delegation I contacted were available for interviews about the tax plan.)

The Kansas experiment still has its defenders, and chief among them is Brownback, who encouraged President Trump to use his plan as a model and accepted its demise only after the GOP-controlled legislature overrode his veto in June. The Koch-backed Americans for Prosperity hasn’t wavered, either; the conservative advocacy group has attacked state legislators for raising taxes in Kansas and campaigned aggressively for tax cuts in Congress, even at the expense of spiking the deficit. But some of the most influential believers in the revenue-generating power of tax cuts are now in the Trump administration. “Not only will this tax plan pay for itself, but it will pay down debt,” Treasury Secretary Steven Mnuchin said last month.

When I relayed that argument to Bollier, she just laughed. “I can only say: Look at Kansas,” she replied.