A decade after Kansas’s failed taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. experiment, memories linger and continue to color the debate on tax reform and tax relief across the country, no matter how dissimilar other states’ plans are from the unbalanced and imprudent plan championed by then-Gov. Sam Brownback (R).
The Kansas experience is so infamous that “what about Kansas?” is almost guaranteed to be a question—sometimes as a retort, but often a genuine expression of concern—any time any state explores tax relief. So here’s a question: what about the other two dozen states that have cut their income taxes since then?
Twenty-five states have lower income tax rates now than they did when Kansas adopted its tax cuts in 2012; only four states and the District of Columbia have higher rates since. If the Kansas experience were typical, we should be hearing cautionary tales from those other 24 states as well. We aren’t.
* Kentucky and Missouri have revenue triggers in place which will continue to phase in rate reductions, with no defined end point, subject to revenue availability.
** Nebraska reduced its lower rates but kept the top marginal rate unchanged.
Notes: Mississippi has also adopted legislation reducing its individual income tax, but rate changes are not in effect for 2022. This list also excludes New Hampshire and Tennessee, which have eliminated (TN) or are eliminating (NH) taxes on unearned income during this period but have always exempted wage income.
Source: State statutes; Tax Foundation research.
|District of Columbia||8.95%||10.75%||—|
Notes: New York has adopted reductions to rates on middle-income brackets but has raised top marginal rates. This list excludes Washington state, which does not tax wage income but recently adopted a capital gains income tax.
Source: State statutes; Tax Foundation research.
In fact, far from tax cuts precipitating a Kansas-like crisis, tax collections have risen more on average in the past decade in the 25 states that cut income taxes (31.9 percent in inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. -adjusted terms) than in the four states and D.C. that raised them (27.8 percent). This is not to say that tax cuts paid for themselves, of course: while they boosted economic growth and thus cost less than without dynamic feedback effects, lower rates are not responsible for higher collections. Those five jurisdictions that raised income taxes are a small sample, and there is a great deal of variation in both sets of states.
|Inflation-Adjusted Growth Between FY 2012 and FY 2021|
|All Taxes||PIT Only|
|Net Rate Cuts||31.9%||43.4%|
|Net Rate Increases||27.8%||38.6%|
|All PIT States||33.2%||46.3%|
Sources: U.S. Census Bureau; Tax Foundation calculations.
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.
But if that’s the case, then what was the matter with Kansas?
The issue was one of extreme imbalance combined with a poor policy design that exempted all pass-through income from taxation and encouraged tax avoidance activity. Policymakers initially considered a $900 million tax cut offset with a roughly commensurate amount of spending reductions. But because such deep cuts were never particularly feasible—the state’s general fund budget was $6 billion—lawmakers eventually decided to move forward with tax cuts while jettisoning the offsetting reductions, accompanied by some hand-waving about how the difference would be made up through tax cut-induced economic growth.
Suffice it to say, that didn’t happen. If anything, the opposite occurred. Businesses, concerned about the state’s solvency, were increasingly leery. They understood that either essential state services would suffer, the revenue would be made up (and in potentially less competitive ways), or both. In time, lawmakers raised rates (though not to previous levels) to stabilize revenues, and the Kansas experiment was rightly written off as a failure.
You might say that Kansas policymakers learned the hard way that most tax cuts don’t pay for themselves, but that might give too much credit. It assumes they actually believed that rate reductions would instantly offset the revenue loss, rather than using that as a face-saving excuse to continue with rate reductions once the pay-fors were eliminated—or as a convenient claim with the unspoken hopes that the spending cuts would follow.
The reality is that there are positive economic feedback effects of lower taxes, but that except in the rarest of circumstances, they are nowhere near large enough to pay for tax cuts on their own. A more competitive tax code promotes economic growth, and that economic growth yields higher collections per percentage point on the now-lower rate, but not more than would have been generated under the higher rates.
Often that’s fine, and in fact desirable. If states are experiencing revenue growth, they have an opportunity to return some of that growth to the taxpayers and further galvanize that growth trajectory rather than absorbing it all into state government. Most states, unlike Kansas, funded their income tax rate cuts either by returning a portion of projected revenue growth with their taxpayers, adopting revenue offsets that are more economically efficient than the income tax, or both.
In an era of increased mobility for individuals and businesses alike, maintaining tax competitiveness is crucial. No one wants to be Kansas, true. But with people having more flexibility in choosing where to live and work than ever before, states would do better to imitate North Carolina, Utah, or many others which have cut—and, even more importantly, reformed—their income taxes than states like New Jersey which are trending the other way.Share