The 2017 tax bill enactment has left some of us who follow the federal budget wondering whether we are headed the way of Kansas.
In 2012, the state’s Republican governor, Sam Brownback, led his GOP-dominated Legislature to significantly reduce Kansas’ business taxes and set a path to cut income taxes to “zero.” Brownback hailed the tax cuts as a “real-live” experiment in conservative governance that would lead to an explosion of economic growth for the Sunflower State. The real results were anything but sunny.
Even with increases in sales and cigarette taxes in 2015, Kansas’ revenues declined more than 10 percent in a three-year period. The promised economic growth did not materialize, and an expanding budget deficit, combined with the state’s balanced budget requirement, rippled through basic public services. Funding was reduced for Kansas schools, state prisons and health care services. Dedicated state highway funds were diverted to general funds, and state pensions took a hit. The state’s S&P bond rating was downgraded twice, making it more expensive to borrow.
Recognizing the state budget crisis, the same GOP-dominated Legislature that enacted the tax cuts in 2012 reversed course in 2017 and raised $1.2 billion through the individual income tax. The governor’s veto was quickly overridden.
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Are there any lessons here for the federal government? Maybe.
First, budget estimators sometimes get it right. While there is good reason to question the precision of long-range, 10-year estimates, the direction of the revenue estimate of the enacted tax bill is clear — it is negative. The GOP tax legislation, like the Kansas experiment, won’t pay for itself with economic growth. Using either static or dynamic estimates, and assuming expiring middle-class tax cuts will be extended, the bill’s impact on the federal deficit is unequivocal — it will increase between $1 trillion and $2 trillion over the next decade.
Second, the good news is the American economy is likely to continue going strong in 2018, with or without the benefits of new tax cuts. This is not the economy of Kansas. Unemployment is at 4.1 percent, the lowest in more than a decade. Aggregate corporate profits are at an all-time high. The stock market is at a peak. In November, consumer sentiment hit a 17-year high. The economic expansion has exceeded 102 months and, if it continues into 2018, will be the country’s second-longest in history.
The bad news is the tax cuts are ill-timed. They could throw gasoline on an already fiery economy, leading the Fed to tighten. The seeds of an economic downturn may have been planted in the tax bill. One thing is certain — all expansions eventually come to an end. Reversing a downturn with further tax cuts on the heels of this one would be problematic. The job of growing the economy would then fall to either the Fed, which could reverse course and decrease rates, or Congress, which could enact new spending to prime the pump. Either way, the federal debt will continue to grow.
Finally, unlike Kansas, the federal government is not required to balance its books. Indeed, without this requirement, Kansas could have simply issued more debt. That is how the federal tax legislation will be financed. It’s not the only way, however, as spending could also be reduced.
To meet President Donald Trump’s stated goal of balancing the budget in 10 years, the budget he transmits to Congress next month will have, as its starting point, a deficit of more than $1 trillion in 2019, growing to nearly $2 trillion by 2028. This is not only an impact of the tax cuts, but of forthcoming increases in spending caps for defense and nondefense programs and disaster funding.
With Social Security and Medicare not to be touched as the president promised and no new revenues to be raised, nearly all federal programs defined as mandatory spending would have to be eliminated completely — not reformed, but terminated. Farm programs, Medicaid, civilian and military pensions, food stamps, veterans’ education programs and others could be axed.
As in Kansas, significantly terminating or limiting basic government programs would be politically unpalatable. The solution would be simply adding, once again, to the growing federal debt.
In “The Wizard of Oz,” Dorothy exclaimed, “Toto, I’ve a feeling we’re not in Kanas anymore.” We may not be in Kansas in 2018, but we are on an uncertain yellow, turning red, brick road.
G. William Hoagland is a BPC senior vice president, helping direct and manage fiscal, health, and economic policy analyses. He previously served as vice president of public policy for CIGNA Corporation, staff director at the Senate Budget Committee, and director of budget and appropriations in the office of former Senate Majority Leader Bill Frist.
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