Gillespie’s Flawed Tax Cut Plan

In the last two decades, a number of states have cut taxes deeply in hopes of spurring economic gains, with unimpressive results.

Center on Budget and Policy Priorities.

If there was a Republican talking doll, you would pull its string and it would say “cut taxes.” That’s what every Republican candidate preaches, including Ed Gillespie, as if anticipating some sort of Pavlovian voter response. Specifically, Gillespie promises that his 10% tax cut will diversify the Virginia economy and create 50,000 new full-time private-sector jobs in five years.

The problem is, it just won’t work. How can we be so sure? Because states have tried it many times in the past, and it almost always fails.

For example, in 2012, Kansas Governor Sam Brownback’s plan cut the top income tax rate from 6.45% to 4.9% and the bottom rate from 3.5% to 3.0%, and stopped taxing pass-through business entities like partnerships and sole proprietorships. The goal was to create new jobs, convince businesses to move to Kansas and to increase disposable income in the state by $2 billion dollars in five years.

What happened? Revenues edged up slightly in 2013 and dropped by close to 25%, or $700 million dollars thereafter (see chart below). Former state budget director Duane Goossen (now with the Kansas Center for Economic Growth), estimated that if the tax cuts hadn’t occurred, Kansas would be collecting more than a billion dollars a year in extra taxes.

Tax revenues and education spending in Kansas after 2012 tax cut.

Since Kansas must have a balanced budget by law, the revenue shortfall spurned massive spending cuts across the state, mostly out of the education budget (see chart above). As a result, “Kansas falls well below national averages in a wide range of public services from K-12 education to housing to police and fire protection.” What about job creation? Kansas job creation trailed the US average significantly, and also trailed in GDP growth. On June 7, the Republican-controlled Kansas legislature boosted income taxes to stop the bleeding, overriding the Governor’s veto to do so.

Analyzing the Kansas cuts, the Brookings Institute stated:

There are other, more general takeaways from the tax cut experiment. When Kansas cut taxes, its bond rating went down, and it had to cut central services such as education and infrastructure. After seeing this, a majority of Kansans decided they would not prefer to keep the tax cuts. The experiment in Kansas has important implications for federal tax reform, the first being not to expect tax cuts to boost the economy much, if at all.

More Tries, More Failures

Back in 2015, the Center on Budget and Policy Priorities analyzed five states that cut taxes in an attempt to create more jobs. As you can see in the chart below, four of the five trailed the US average.

The Center also tracked job growth in the biggest tax-cutting states in the early 2000s, and in the 1990s, and analyzed other studies tracking the same issues. The Center concluded, 

States considering personal income tax cuts this legislative session should be skeptical of claims that these tax cuts will improve the state’s economic performance. In the last two decades, a number of states have cut taxes deeply in hopes of spurring economic gains, with unimpressive results.

Rather than bet their futures on a tax-cutting approach that has not worked well in the past, states would do better to concern themselves with improving their schools, transportation networks, and other public services that act as building blocks of economic growth.

Regarding Kansas, back in 2012, Kansas Governor Brownback called his plan a “real live experiment.” It’s an experiment that Virginians can’t afford.