Starving the Beast in Kansas

By Kevin D. Williamson

Tuesday, May 03, 2016

Conservatives tell two incompatible stories about tax cuts.

The first story is the naïve supply-side story, that tax cuts pay for themselves or even pay for themselves and then some. There isn’t much evidence that this is true.

There are, in many circumstances, growth effects from lower tax rates, sometimes large ones, and these can offset the expected revenue losses associated with tax cuts. But in the context of a complex, modern economy in a developed country without absurdly confiscatory tax rates, what that means is that tax cuts may produce only 80 cents in lost revenue for each $1 predicted by so-called static-scoring models. Growth effects might offset 4 cents on the dollar of revenue losses, or 20 cents, or 55 cents, but they do not offset 100 cents on the dollar, much less 125 cents on the dollar. Arguments to the contrary usually fall into the error of attributing 100 percent of economic growth (and associated growth in tax revenue) to tax cuts, when that is almost certainly in error. 

The second story is the fairy tale called “Starve the Beast.” This version is economically more realistic but politically a fantasy. It takes to heart Milton Friedman’s advice about self-funding tax cuts: “If a tax cut increases government revenues, you haven’t cut taxes enough.” The idea behind Starve the Beast is that if you cut revenue enough, then either fiscal pressure or political pressure will inspire politicians to make spending cuts that they otherwise wouldn’t make.

Starving the Beast hasn’t worked at the federal level, because the Beast has excellent credit and owns a factory that allows it to throw a switch and exnihilate into existence all the Beast-Treats it likes. Every election cycle, the out-of-power party gets religion about public debt and deficits: Remember Senator Obama’s declaring George W. Bush “unpatriotic” because of the debt that was run up during his presidency? Once back in power, those same politicians tend to worry a great deal less about deficits. The Starve the Beast theory relies on shame and eventual rectitude at the federal level to eliminate deficits, and it fails like all political models based on Washington’s capacity for shame and its care for rectitude.

But might it work at the state level, where legislatures generally are bound to balance their budgets, at least on paper, from year to year?

Let’s check in with Governor Sam Brownback and his colleagues in Kansas.

Governor Brownback’s first tax-cut proposal was much more restrained than the one that the legislature eventually passed. It significantly reduced income-tax rates but offset many of those rate cuts by eliminating many credits and deductions, including those for mortgage interest and child care, along with the state’s earned-income tax credit. Brownback’s original proposal also left standing a plan to increase the state sales tax, which would have offset some of the losses from the income-tax rate reductions. (Relatively high sales taxes and property taxes, and not mere thrift, is how states such as Texas manage without a state income tax.) That model — cut rates but eliminate deductions — will be familiar to those who follow federal tax-reform efforts.

The legislature did what legislatures always do: It kept the popular bits (the rate cuts), jettisoned the unpopular bits (the offsets), and sent the result to the governor, who signed it.

This has made Governor Brownback a hate totem for Democrats across the country. But before they go getting on their high fiscal horses, Democrats should consider the fact that their likely presidential nominee, Hillary Rodham Clinton, wants to keep the expensive parts of the Affordable Care Act but nix the unpopular bits that help pay for it, especially the “Cadillac tax” on the generous health-care packages enjoyed by her union-goon constituency. It’s easy to be righteous about the other guys’ tax-cut shenanigans.

But these are shenanigans.

State government in Kansas is mainly a money-launderer: It collects revenue that local governments forgo collecting and then distributes it to those municipalities and school districts, a pass-through that accounts for about half of state spending. Much of the rest of the money goes to familiar expenditures: roads and other state-maintained infrastructure, state universities, and compensation for the state’s not-inconsiderable work force.

When Governor Brownback first started talking about large tax cuts, the story for public consumption was naïve supply-side: A more business-friendly Kansas would boom, and new jobs and investment would offset the projected revenue losses. That didn’t happen, and it’s not entirely clear that anybody really expected it to, inasmuch as Kansas Republicans were talking Starve the Beast from Day One. Representative Owen Donohoe, for example, said that the new fiscal dispensation was “the greatest thing that’s ever happened to Kansas,” and that it would — here’s the delusional part — “force us to be more efficient.” That’s a nice story, as he told it: “If we become more efficient, that means we provide the same if not better services to the people, and we do it at a lesser cost and save money.”

But that isn’t what happened. It never is.

Kansas just passed a new budget (in the middle of the night, allowing editorialists and speech-writers to deploy one of their favorite clichés: “under cover of darkness!”) that imposes general cuts (3 percent for most state agencies), large cuts to highway spending, significant cuts to the state universities, and — this part is indefensible — it delays state payments to the fund that sustains its government-employee pensions, putting Kansas on the same unfunded-liability slippery slope that has helped to make New Jersey and Illinois . . . New Jersey and Illinois.

Worse, all that doesn’t even balance the budget, as required by Kansas law: The legislature’s budget bill would call upon the governor to balance the budget with unspecified spending cuts, a proposal that Democrats rightly have derided as “magic money.”

There is good and bad and ugly in this. Kansas isn’t a bloated mess like California, but its agencies probably could stand 3 percent spending cuts, though the presence of uniform, across-the-board reductions usually means that the question has not been examined in sufficient detail. If all the cuts are enacted and Brownback delivers on the magic-money reductions, then Kansas’s cash reserves will grow from $27.4 million to $81 million, which would be excellent. But that extra cash is dwarfed by the $96 million in pension-fund obligations that the state will be refusing to pay until 2018. Those obligations do not go away simply because the state treasurer doesn’t write the check: They remain, and grow, with interest.

Unserious men promise to Starve the Beast and balance budgets by eliminating “waste, fraud, and abuse,” the formulation relied upon by, among others, Donald Trump, 2016’s poster-boy for terminal unseriousness. Delusional politicians insist that significant tax cuts can be offset by simple gains in efficiency — but if it were that simple, then why not implement those cost-saving measures first and the tax cuts afterward?

(Answer: Because it is not simple.)

There are gross spending abuses at every level of government, from Harry Reid’s federally subsidized cowboy-poetry festivals to million-dollar paydays for superintendents of small suburban school districts. These are work for the meat cleaver, not the scalpel. But about 80 percent of what the federal government does is Social Security, Medicare, Medicaid and other health-care spending, national defense, and paying interest on debts incurred by previous Congress’s refusal to implement taxes sufficient to pay for that spending. Most of what state and local governments spend their money on is public schools, state universities, police, roads, and ordinary municipal services. Yes, it’s bonkers that Lubbock, Texas, spends about a quarter-million a year on a city manager, but that’s still chump change compared with what schools and police cost.

We are not going to balance the federal budget without cutting Social Security and other popular entitlements as well as the military, and Kansas is not going to bring its spending down to match a lower revenue line without touching education and the roads. It isn’t going to happen.

Yes, conservatives believe in smaller government, but conservatives also believe in prudence — and that our political calculations must in the end take account of reality. And here’s the reality that every politician eventually discovers: You can promise to Starve the Beast, but in the end, the Beast is Us.