Call it the Brownback effect.
“It’s a cautionary tale on a national scale … Many of us felt that [Kansas] had been too aggressive,” said Indiana Senate Majority Leader and tax committee chairman Brandt Hershman, who helped GOP Gov. Mike Pence cut corporate taxes last spring. “We all like low taxes … but we have to ensure the stability of a revenue stream to provide basic services that our citizens expect.”
It’s a major turnaround from two years ago, when Brownback was considered a Republican trailblazer for conservatives around the nation who dreamed of phasing out their state income tax.
Now, Republicans are rethinking how aggressive they can be on taxes in light of the projected $279 million revenue gap that’s plaguing Kansas this year — shortfalls that resulted in the state’s credit rating being downgraded and nearly booted the Republican from office in a state that bleeds red.
Of course, Republicans aren’t ditching supply-side economic theory or tax cuts. But they’re considering ways to avoid Kansas’ troubles. Their takeaways include smaller cuts over extended periods of time, stopgaps to protect revenues — and avoiding overpromising.
It’s making for an odd dynamic in which some Republicans now proudly say their tax plans will be “incremental” or “evolutionary” instead of “revolutionary.”
“Kansas did too much too fast, so at this point we’re continuing to look at our tax policy to make sure it’s competitive. But we’re not jumping — not following Kansas,” said Missouri state Sen. Will Kraus, a GOP tax writer who in 2013 pointed to Kansas as the reason tax cuts were needed in the Show Me State.
Brownback, in 2012 and 2013, signed a two-part tax package exempting 191,000 businesses from income taxes and lowering the top income tax rate for individuals from 6.45 percent to 4.9 percent. It sinks to 3.9 percent by 2018 and even further toward zero each year if revenue grows.
Although income taxes composed almost half of Kansas’ general fund, Brownback said the cuts would grow the economy and attract new business, so that revenue would spring back quickly, essentially paying for the cuts. He had Reagan-era tax guru Arthur Laffer at his back supporting him.
But his plan didn’t pan out. Revenues are way down, and job growth remains below the national average. His own budget director says they may have to stop some of the tax cuts from going into effect, according to a New York Times interview.
Republican tax cutters in other states want to avoid that fate.
In Ohio, Kasich — a potential 2016 hopeful who has already cut $3 billion in taxes — is expected to roll out another income tax cut proposal in early 2015. But two administration sources assured POLITICO they won’t have Brownback’s issue.
“The governor worked very, very hard in order to balance our budget and restore fiscal responsibility, and we’re going to be careful not to do anything to threaten that fiscal stability,” said Kasich’s budget director, Keen, when asked about the upcoming tax plan and lessons learned from Kansas.
Unlike Brownback, who slashed income taxes by about 25 percent right away then set up a system to reduce them more over time, Ohio has taken an incremental approach, giving taxpayers a 10 percent income tax cut over Kasich’s first three years.
They also have proposed to pay for additional cuts through a new oil severance tax increase. Brownback also proposed some offsets to his tax cuts — throwing out certain tax breaks — but legislators gutted those, making the cost of his tax plan soar.
Another difference: They won’t rely on optimist revenue growth assumptions, a major critique of Kansas’ cuts.
“The governor [has] insisted on conservative … revenue forecasts,” Keen said.
Other states are looking at similar approaches. In Georgia, which is sandwiched by two states with no income taxes, Republicans want to lower the income tax rate. They don’t currently have the funds, said GOP state Senate Finance Committee Chairman Judson Hill, but when they do, they’ll protect against revenue shortfalls by taking things slowly to “minimize near-term shortfalls.”
In Iowa, state Ways and Means Chairman Rep. Tom Sands, also wants to eliminate income taxes but said they might have to go slow, starting with an optional flat tax.
“Instead of just flat-out rewriting Iowa’s income tax code and doing away with all nine brackets … by doing the option, you’re letting people move to the direction they want to head, taking a little, smaller step to where we need to go, [which] doesn’t create the huge swing you might see in a complete income tax rewrite,” he said.
In Missouri, Republicans like Kraus proudly noted that while Kansas eliminated taxes on small businesses, they did only a 25 percent tax deduction to lower their taxes. And their income tax cuts were much smaller, he said: only half a percent, phased in over five years starting in 2017.
“We’re trying to protect the core levels of funding so we don’t disturb … state government,” he said.
By contrast, Kansas’ cuts to education as a result of the revenue hit was a contentious issue in Brownback’s near defeat to Democrat Paul Davis last month.
Kraus also noted that Missouri tax rates would be drawn down further only if revenue hits a certain “trigger” threshold, protecting against big revenue losses.
Several Washington-based Republican tax wonks said such triggers are something they expect to see more of to safeguard against what happened in Kansas.
And their prediction seems to be on target. Hill in Georgia, for example, said a “phased-in approach with certain milestones to be met before you trigger additional tax changes seems to be a wise and fiscally responsible way to do it.”
In Indiana, Pence once pushed to ax the income tax, but now says the focus is streamlining tax laws and the state has “no specific plans at this time” to cut tax rates more, according to his budget chief.
“The governor right now is focused on simplification and reducing the complexity of the Tax Code,” said Chris Atkins, the budget director.
Hershman of Indiana said they’re in an “evolutionary phase rather than revolutionary” phase on taxes.
Republicans say they learned another lesson from Brownback: Don’t overpromise that tax cuts are going to spur job and revenue growth right away — be realistic.
“You can’t promise that everything is going to change overnight,” said Jonathan Williams, top tax adviser at the conservative policy group American Legislative Exchange Council, which lobbies states. Williams believes Brownback’s tax plan will pan out eventually, but he said messaging is key. “It’s going to be a change of incentives over several months and years.”
He said Republicans should tell constituents that “not all tax cuts pay for themselves” and warn about potential revenue shortfalls.
Some are already heeding his message.
An Arizona Republican close to GOP Gov.-elect Doug Ducey, who wants to make serious changes to the state’s Tax Code, said they’ll communicate more realistically than Brownback: Though they think tax cuts grow the economy, “we have never said decreasing taxes would increase state revenue.”
Republicans have learned a budget lesson from Brownback, too: Make sure you have the money.
“What Republican generally learned about the Kansas experience was to make sure you have the budget handled before you embark upon the tax changes,” said Stephen Slivinski, a senior economist at the conservative Goldwater Institute, who added that “if tax cuts are ever going to be in the offing, you have to handle the budget and do so in an honest clear way to make sure there may not be traps that might have befallen the Kansas effort.”
At least two big Republican tax reformers are already showing signs that they’re taking this advice.
Walker has drastically scaled back his tax-cutting rhetoric since earlier this year and, according to two Wisconsin GOP sources, is putting his hopes to eliminate the income tax on the back burner.
“I don’t want to say the Laffer theory is disproven, but it’s a difficult time to advance that way in Wisconsin because our revenue numbers aren’t as robust as we need,” said a senior Senate GOP leadership aide, adding that Republicans were disappointed that Walker tax cuts from earlier this year didn’t grow revenue as much as they predicted.
Earlier this year, just before enacting the half-billion-dollar tax cut, Walker said it was just the beginning — that he wanted to eliminate income taxes. Now, a representative of Walker, asked about the elimination plan said the governor “has only said that he would explore other areas of tax reform.”
The state has a projected $2.2 billion deficit for the next biennium, 2015 to 2017. There’s also a transportation funding problem.
Now, not even his top allies in the House think new cuts aren’t possible.
“It’s more likely that we will not have an opportunity to do the same level of big bold tax cuts as we did in the past,” said Wisconsin House Speaker Robin Vos, a key Walker ally. “It’s unlikely we’ll be able to eliminate the income tax.”
Elimination is also absent from Walker’s policy priorities document for his next term. He simply says he wants to “reduce income taxes so that they are lower in 2018 than they are today.”
In the meantime, Vos says they’re keeping an eye on Kansas: “I definitely share the goals of the way … Kansas went, which is to say you want to reduce taxes on the people who create jobs so they reinvest by hiring more people. … But the jury is still out so I’d rather watch what happens for another year or two before we follow their lead.”
Arizona’s new governor-elect is in a similar boat. Ducey ran on a platform of reducing income taxes as close to zero as possible, but his transition team is now facing a potential $500 million budget shortfall and court order mandating the state spend more on education.
So tax reform and tax cuts will likely have to wait.
“Because we’re facing such a large budget shortfall, I haven’t heard anyone speak of cutting taxes any more than we already have,” said Jennifer Stielow, vice president of the Arizona Tax Research Association, who sits on Ducey’s budget study committee that will offer up recommendations for his first budget. “It’s not the environment to propose something like that.”
Kim Dixon contributed to this report.