Kansas a case study on why cutting taxes will not boost growth

WASHINGTON • Cut taxes to boost growth: Long before Mr Donald Trump became president, Kansas conducted a real-world experiment with this formula in the hopes of reviving its economy. But today, the mid-western state is beating a hasty retreat after the demonstrable failure of the ideas that have been embraced by the White House.

In 2012, staunchly conservative Governor Sam Brownback rolled out what he promised would be "a shot of adrenaline into the heart of the Kansas economy", which depends heavily on agriculture and aerospace.

Similar in many ways to the Trump administration's fiscal plans, the shock therapy cut local income taxes for the very wealthy and eliminated certain taxes on small business revenue, particularly for the self-employed.

Mr Brownback promised the strategy would create thousands of jobs, encourage Americans to move to the state and help make it "the best place in America to start and grow a small business".

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Five years later, the party is over.

Growth has plummeted to below 1 per cent, from 3 per cent in 2012, falling well below the national average, according to the St Louis Federal Reserve Bank.

As a result, tax revenues dried up, blowing a US$900 million (S$1.2 billion) hole in the state's budget in two years, creating a crisis in which the government is struggling to provide basic services.

"The revenue loss was much larger than anticipated because people took advantage of the cuts by turning themselves into small businesses or independents to avoid paying any taxes," said Mr Alan Cole of the Tax Foundation in Washington.

In March, the state Supreme Court ruled that the education system in Kansas failed to meet minimum standards guaranteed under the state Constitution.

"This plan was an absolute disaster. It caused economic destruction," said Mr Jim Ward, leader of the opposition Democrats in the Kansas House of Representatives. "There was just nowhere you could point to where it was successful in terms of providing core services."

Even Republicans now repudiate the Brownback tax plan.

After losing 12 seats in last year's elections, the large Republican majority has approved a US$1.2 billion tax hike over two years - overriding a veto this week to do so, in a show of determined opposition to the governor.

"It's an illusion to think that you can get more revenue by cutting taxes, it's a fantasy," said Mr Charles Wheelan, senior lecturer at Dartmouth College. "You cannot eat more ice cream and expect to lose weight."

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A version of this article appeared in the print edition of The Straits Times on June 19, 2017, with the headline 'Kansas a case study on why cutting taxes will not boost growth'. Print Edition | Subscribe