It started last night with Politico’s coverage of Paul Ryan’s struggles to sell the border adjustment – a controversial component of his tax reform plan – to fellow Republicans. And it continued this morning, when the Kansas State Senate voted 22-18 to roll back Governor Brownback’s famed 2012 tax cuts. As a progressive in favor of reasonable tax policy, which funds public programs like schools and infrastructure, it has been a tough couple of weeks staring down the barrel of a disastrous Republican tax reform proposal. But these events provide reason for at least some limited optimism.
The Brownback tax cuts, which were the subject of a great episode of Planet Money, cut state income rates dramatically and eliminated passthrough business taxes altogether. The cut, designed by famed tax-hating economist Arthur Laffer, was supposed to lead to exponential growth and a revenue boom when businesses flooded the streets of Topeka seeking new low rates. What happened, you ask?
What happened was that state tax receipts dropped by $700 million in one year – erasing roughly a quarter of all state revenue from the year prior – and two years later the tax-cut-spurred growth generated only $30 million in new tax receipts. Growth you say? Yeah, I guess you could call it that; according to the Center on Budget and Policy Priorities, Kansas’s reward for slashing top income rates by a quarter and relinquishing its claim on all passthrough income, was a whopping 4.8 percent GDP growth. For those keeping score at home, that’s half the rate seen by the rest of us foolish taxpaying states.
To plug this year’s $348 million budget shortfall that resulted from all this tax cutting fun, Governor Brownback cut $17 million from state university budgets, delayed $93 million in teacher pension contributions, and, over the last two years, drew $750 million from highway improvement and other state projects. The governor has insisted he will not sign the legislature’s rollback into law (and why would he, with such positive results?), but the Kansas State Constitution stipulates that any bill passed and not vetoed within 10 days becomes law.
And what of Mr. Ryan? That’s another sad story.
According to Politico, his fellow Republicans are hung up on the border adjustment – effectively a tariff on imports – which is a key component of the Brady-Ryan tax plan, meant not only to privelege American-made over foreign-made goods, but to generate revenue that the plan would lose by cutting the corporate rate from 35 to 20 percent and by not taxing sales to foreign consumers. For thoughts on how this massive tax cut will work out for the economy, I encourage you to read the Roosevelt Institute’s brand new paper, Fool Me Once: Why Another Corporate Tax Cut Won’t Boost the Economy, authored by myself and Roosevelt Institute Senior Economist Marshall Steinbaum. Alternatively, see the first four paragraphs of this blog post.
In the paper, Marshall and I point out that the border adjustment is the feature most likely to go – not just because it is regressive and an enormous departure from our generally open economy, but also because, as enacted, it is probably illegal based on WTO trade agreements. I did not think this would spoil Ryan’s appetite for destruction tax cuts, but interestingly, the Politico piece suggests he is unwilling to abandon the adjustment in favor of the larger plan. In it, he is quoted saying, “I am going to die on this hill.” Only kidding. But the article does allude to statements made by Ryan, which indicate his position that tax reform will happen with the border adjustment or not at all.
If that’s the case, then maybe we really do have something to celebrate on this lovely Friday evening!