With Republicans in charge of both the House and Senate next year, tax “reform” is again on the agenda. U.S. Rep. Paul Ryan, expected to chair the tax-writing House Ways and Means Committee, has committed to three basic goals on his reform agenda:
— Reduce the top corporate tax rate from 35 percent to 25 percent;
— Reduce the tax rate on the wealthiest of Americans from 39.6 percent to 25 percent;
— Reduce the number of tax brackets from the current seven to just two: The aforementioned 25 percent top bracket, and a second bracket of 10 percent.
So, with corporate after-tax profits at an all time high, with median household income falling while income for the top 1 percent soars, the Republican solution to our economic problems is to cut taxes substantially for corporations and the wealthy. It is good-old-fashioned trickle-down economics — nothing has changed.
Ryan’s plan raises all kinds of issues, not least of which is the deficit. How do you slash government revenue without sending the deficit soaring? Well, one way to do it is to cheat.
Ryan and other top Republicans have made it clear that they intend to use “dynamic scoring” in assessing the revenue impact of their tax package. In short, they will assume beforehand that their new tax plan produces the “supply-side” economic miracle that they claim it will, and they will base future budgets on assumed revenue growth that will probably never materialize.
As it happens, we have a very recent example of the dangers of that approach in the economic laboratory known as Kansas. There, conservative Republicans under the leadership of Gov. Sam Brownback enacted major tax cuts for businesses and the wealthy in 2012, promising that the resulting economic boom would send government revenues soaring and avoid major cuts in education and other programs.
The Kansas Policy Institute, a conservative “think tank” and a sister to the Georgia Public Policy Institute, was a major champion of that approach. “Using dynamic analysis, we can reasonably predict the additional economic and revenue effects of a significant income tax cut,” KPI claimed, predicting that by fiscal 2015 — which is right now — those tax cuts would produce state revenue growth of roughly 4 percent a year.
They were extremely confident, and weren’t shy in promoting themselves.
“My focus is to create a red-state model that allows the Republican (presidential) ticket to say, ‘See, we’ve got a different way, and it works,’ ” Brownback told the Wall Street Journal in 2013. He also relayed a conversation in which Mitch McConnell told him that ‘This is exactly the sort of thing we want to do here, in Washington, but can’t, at least for now.” A McConnell aide confirmed the conversation to the WSJ.
Instead, fiscal disaster. The tax cuts were implemented, but revenues have dropped significantly and have not rebounded as “dynamic analysis” predicted. The state’s credit rating was downgraded and will probably be cut again; thousands of teachers and other public employees had to be laid off; and instead of the promised boom, the state has added jobs at half the national rate. The backlash has been so severe that even in a state that Mitt Romney won by 21.5 percentage points, Brownback won re-election this month by less than four points and got less than 50 percent of the vote.
Brownback won that race largely by promising Kansans that the worst was over and that the revenue shortfall last year was a one-time thing. “We’ll finish this year with several hundred millions of dollars cash on hand, so we’re going to be in fine shape,” he told voters.
He lied. On Monday, six days after Brownback’s re-election, the state issued a revenue update revealing that the situation was even worse than imagined. Its $380 million in reserves are almost gone and the state will have to cut another $280 million just to make it through the rest of the fiscal year. Next year, it will need to cut another $436 million. In a small state like Kansas that had already made serious cuts, those reductions are dramatic.
The future is no brighter. In fiscal 2016, revenue growth is now projected to be just 0.7 percent; in fiscal 2017; it is now projected to rise by just 1.1 percent. Yet thanks to “dynamic scoring,” the entire state budget is predicated upon the fiction that revenue growth would be the 4 percent promised by the Kansas Policy Institute.
And I do love KPI’s response to just how embarrassingly off-base its “dynamic analysis” turned out to be:
“Kansans deserve better than ‘sky is falling’ scare tactics. We encourage legislators and media to honestly examine facts without political filters and present citizens with viable solutions to provide services at a better price. No finger pointing … no attempts to score political points … and no shading the facts … just civil debate of viable solutions.”
No. You wouldn’t want anybody to point fingers.
UPDATE: On Twitter, a reader points out that North Carolina went through the exact same thing: Big tax cuts; promises of revenue growth that didn’t materialize; major budget crisis:
“Raleigh, N.C. — New figures from legislative analysts confirm the 2013 cut to individual income tax rates is costing the state far more than originally projected.
Last year, Republican leaders authored a plan to cut income taxes from a three-tiered marginal system of 6 percent, 7 percent and 7.75 percent to a flat rate of 5.8 percent for 2014 tax year.
According to a memo Thursday from legislative analyst Brian Slivka and chief economist Barry Boardman, the updated cost of the tax cut is $680 million for the current tax year.
That’s $205 million, or 43 percent, higher than the original projection of $475 million.
The cost for the 2015 tax year is also projected to be $200 million higher than original estimates – $890 million rather than $690 million. Additional tax cuts are set to take effect Jan. 1.
In the memo, Boardman and Slivka explain that the revision is due to the fact that North Carolina wages have not grown as quickly as projected last year.”