Tax policy rarely becomes famous. But when Kansas cut income taxes severely in 2012 and 2013, the state's tax experiment became so well-known it is now synonymous with failed tax cut policy. The experiment failed so badly that the legislature voted to overturn the tax cuts just six years later.
Yet, the Montana legislature is trying to lead us down the same yellow-brick road. Governor Gianforte's tax cut proposals vary somewhat from the Kansas approach. However, they are similar in the significant reduction of state revenue, and what we know from the Kansas experiment is deep cuts to state revenue do not lead to economic growth.
In 2012 and 2013, the Kansas legislature cut the top income bracket by nearly 30 percent, from 6.45 to 4.6 percent. The plan also cut the tax rate for certain businesses down to zero. The legislature hoped that the plan would lure businesses in with their low-tax rate and spur economic growth. Ultimately, the opposite happened.
While the rest of the country began to recover from the Great Recession, Kansas lagged behind. Over the five years after implementing its tax cuts, Kansas' 4.2 percent private-sector growth was lower than all of its neighboring states (except for Oklahoma), while jobs in the United States as a whole grew by 9.4 percent. Additionally, Kansas' economy lagged behind its six region states and the rest of the country as a whole.
Governor Brownback predicted such robust economic growth that his tax-cut proposal would be nearly revenue-neutral to sell the tax cuts. Unsurprisingly, lower taxes only led to lower revenue. Five years into Kansas' failed tax experiment, the gap between the state's revenue and expenses was almost a billion dollars.
As Kansas hemorrhaged revenue, the state ultimately had to take an ax to the state budget. Between 2014 to 2017, the state enacted nine rounds of budget cuts to deal with its lost revenue.
Kansas slashed funding for roads, bridges, and highway maintenance. It cut K-12 education so profoundly that the Kansas Supreme Court ruled that its education funding failed to comply with its Constitution. Local communities lost vital services like public safety, local health departments, and public libraries. Kansas's credit was downgraded three times, and it increased sales tax twice.
Like Montana, Kansas is a primarily rural state. The dramatic drop in state aid to local government hit Kansas' rural communities the hardest. As a result of the tax cuts, 77 Kansas counties had to pick up the tab to make up for state aid loss by increasing their local tax levies. Of those, 80 percent were rural or frontier counties where services are already more expensive to deliver due to their remoteness and lower populations.
Behind the curtain, there was no magic. Tax cuts led to budget cuts, and Kansans suffered.
Despite this recent real-world example of state tax cuts' failure, Montana seems determined to follow the same path. The Montana legislature is currently considering a slate of tax cut bills that will put Montana at risk of falling behind the rest of the country as we recover from our pandemic crisis. These tax cuts will primarily go to the wealthiest Montanans, exacerbate racial inequalities, and make our tax code even more regressive. For a more in-depth analysis of this and the other tax cut bills in the Montana legislature this session, see our report: What Proposed Tax Cuts Really Mean for Montanans.
A recent concerning development is SB 399 - a massive overhaul of Montana's tax system. Usually, a bill of this magnitude would have had lengthy hearings with weeks or months of debate. Instead, this 100-page bill had its first hearing only 12 days ago. This bill would decrease Montana's top tax rate from 6.9 percent to 6.5 percent, would immediately eliminate 17 tax credits without any review or analysis, and could cost the state nearly $40 million a year in lost revenue by 2025. It would also increase taxes on one in five Montana taxpayers, including about 36,000 with incomes below $60,000. This significant revenue loss amounts to children missing out on necessary services, road repairs going unaddressed, and forgoing opportunities to rebuild and recover from the COVID-19 pandemic.
Montana is trying to recreate Kansas's failed tax cut experiment and hoping for a different outcome. In this session, our legislature should be focused on rebuilding our state, not cutting our resources.
MBPC is a nonprofit organization focused on providing credible and timely research and analysis on budget, tax, and economic issues that impact low- and moderate-income Montana families.
