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Episode 577: The Kansas Experiment

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Episode 577: The Kansas Experiment

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Episode 577: The Kansas Experiment

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SALLY HELM, HOST:

Hey, it's Sally Helm here. The Republicans are about to take control of Washington. And this week, we are replaying an episode about what happened when a Republican governor cut taxes in Kansas. The show originally ran in October of 2014, and we'll have an update for you at the end. For now, here's Robert Smith and Zoe Chace.

(SOUNDBITE OF ARCHIVED BROADCAST)

ZOE CHACE, BYLINE: This is the story of a politician who took a chance and is now fighting for his political life. The man is Sam Brownback, he's the Republican governor of Kansas.

(SOUNDBITE OF ARCHIVED RECORDING)

GOVERNOR SAM BROWNBACK: Let me start off by saying that I am bullish on Kansas.

ROBERT SMITH, BYLINE: This guy expected to be re-elected easily. Sam Brownback won by a landslide four years ago. And when he was elected to the Senate six years before that, also a landslide, and six years before that.

CHACE: Everyone loved Sam Brownback, but things are really upside down in Kansas right now. In fact, last week, I was in a library in Topeka, Kan., and I'm talking to this former budget director for the state of Kansas. And he says, you will not believe what is happening next door.

DUANE GOOSSEN: Next door, about 500 Republicans are going to endorse the Democrat ticket for governor in about an hour.

CHACE: That seems weird. Is that weird?

GOOSSEN: Yeah, that's really unusual for Kansas.

CHACE: And, yeah, I go take a look, and there are all these white-haired guys in suits.

UNIDENTIFIED MAN #1: Thank you all for being here.

(APPLAUSE)

CHACE: Republicans all, former politicians, guys who presumably voted for Sam Brownback, they're lined up at a small podium to endorse Paul Davis, who is the Democratic candidate for governor.

UNIDENTIFIED MAN #1: We're here today to point out the worsening results of Sam Brownback's failed experiment on Kansans.

SMITH: This whole story comes down to this big experiment, an economic experiment. Brownback tried something that should have landed him in the Republican hall of fame, if that exists somewhere.

CHACE: Right, something that I would have thought would have cemented his support as a very Republican governor in a very Republican state. But Sam Brownback is close to losing his bid for re-election because...

SMITH: Sam Brownback cut taxes.

(SOUNDBITE OF BOOKER DOUGLAS AND TATE MCCOY'S "SWAMP FEVER")

SMITH: Hello, and welcome to PLANET MONEY. I'm Robert Smith.

CHACE: I'm Zoe Chace. Today, a Republican governor lives the dream - cuts taxes dramatically in his state.

(SOUNDBITE OF ARCHIVED RECORDING)

BROWNBACK: We're a state in transition from a high tax state to a low tax state.

SMITH: He promises good times ahead, and the good times do not come.

CHACE: And people, even the Republicans, get really mad.

(SOUNDBITE OF BOOKER DOUGLAS AND TATE MCCOY'S "SWAMP FEVER")

SMITH: Zoe, you went to Kansas, so go.

CHACE: I went to Kansas and I drove all over. And everyone was either talking about the World Series or economics, like, deep economic questions basically about Brownback's big experiment. So here's how the whole thing began. Right when Brownback got into office a few years ago, he decided to do this pretty flashy thing in this fiscally conservative, very non-flashy state.

(SOUNDBITE OF ARCHIVED RECORDING)

BROWNBACK: We'll have a real, live experiment. We're right next to some other states that haven't lowered taxes and, you know, we'll see how it works.

CHACE: Republicans love to talk about lowering taxes. Brownback decided he was going to be the guy who would go big. His question was, what would happen if Kansas had the lowest taxes in the Midwest? His big idea was that people in businesses would be like, yes, I am going to go to Kansas, that is where I'm going to do business now. The businesses already in Kansas? They would use the money to expand and hire a bunch of people.

(SOUNDBITE OF ARCHIVED RECORDING)

BROWNBACK: So you really get your acceleration. This is like shooting adrenaline into the heart of growing the economy by taking that tax off of small business where most of your job creation is.

CHACE: Brownback went back and forth with the legislature. And in the end, the bill that they came up with was this tax cut plan that was way bigger than what they thought was even possible in the beginning. Taxes on small businesses would go to zero, so they stopped paying anything. And personal income taxes went down by a lot, also. Like, the highest income bracket went down by 25 percent about. And this leaves a big question, which is after this big tax cut, where is Kansas going to get all the money that it needs to run the state? Like, to pay for education and health care and the stuff that comes out of the state budget. This was the crux of the experiment. There is this famous theory behind this idea in conservative circles that a tax cut, if done correctly, will eventually bring more money into a state. And this theory is pushed by this one economist that you may have heard of - he worked for Ronald Reagan.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED MAN #2: Talk to me, Dr. Laffer.

ARTHUR LAFFER: Yes, can you hear me? I am enjoying the conversation with you, it's very much fun.

UNIDENTIFIED MAN #2: All right.

CHACE: Arthur Laffer. And Brownback wanted the Reagan guy's help.

LAFFER: He called me around the time he was proposing his tax and tax changes in Kansas and asked me to come down, spend some time with him and talk with the legislature.

CHACE: Arthur Laffer is famous for something in economics called the Laffer curve, and it is really more of a thought experiment than, like, a mathematical formula. And I want to spend a minute or so here really explaining it because it is actually the theoretical underpinning of what Brownback did, which is fascinating and weird in and of itself. So, Robert, come back for a second and just - let's walk through this together.

SMITH: OK. So it is really all about tax rates and which tax rate brings in the most money for governments. Let's start in an imaginary place, a place with a 100 percent tax rate. Basically, the government takes every dime you make. You work all day long and you get nothing. The government takes everything out of your paycheck. Now, obviously no one would work with that deal, everyone would quit their job. So in this imaginary place, this 100 percent tax rate, the government would get no revenue, no money.

CHACE: OK. So the government's like, we're getting $0 at a hundred percent, what if we lower taxes to a 90 percent rate? Which is still an incredibly high rate, but some people would go back to work to get that money, just for that 10 percent of their income. They would give the rest of the 90 percent to the government.

SMITH: So this is Laffer's big insight, the Laffer curve, which according to the way the story goes, he drew on a napkin somewhere in a restaurant.

CHACE: Everything is, like, on a napkin.

SMITH: Always on a napkin. And this napkin showed - or so he said - that the government can lower taxes and get more revenue.

CHACE: But just because going from a hundred to 90 would yield more revenue, that doesn't mean it is always true. A government might find if they lowered the rate from say 40 percent to 30 percent, they'd actually just get less revenue because it wouldn't necessarily incentivize so many people to go back to work, revenue would just drop.

SMITH: This is what the Brownback experiment is all about. What happens at lower tax rates? Specifically, what happens if you lower the tax rate for small businesses from an already low percentage in Kansas to zero? Will Kansas get more businesses suddenly? Will those businesses create more jobs? Will eventually there be more people working and more people paying other kinds of taxes that weren't lowered like sales tax? In other words, on the Laffer curve, will the government of Kansas make more money by cutting taxes?

CHACE: That is the bet that Brownback is making, and that is what I asked Laffer about.

Did he say I'm going to run one of the greatest experiments on the Laffer curve that state tax policy has ever seen?

LAFFER: I don't know if he actually said that or not, but he sure as heck has done that.

CHACE: Arthur Laffer says he did not design the tax cut plan himself, but...

LAFFER: I think he did a great job.

CHACE: Laffer is certain, he is for sure that under Brownback's experiment Kansas will thrive.

LAFFER: Well, more employment, more output, more production, more sales taxes because these people have higher incomes. They move from Missouri to Kansas, there are more jobs created in Kansas, there'll be more payroll taxes.

CHACE: And to Republicans in Kansas, that sounded great. Les Donovan was a Republican state senator at the time. He remembers it. He helped push this plan through.

LES DONOVAN: To cut the tax out on these certain types of income - business income - is an incentive for people to hire more people. They're going to not pay the taxes to the state of Kansas, but they're going to hire people, give them jobs, and they're going to pay taxes to Kansas. And that's the way this is supposed to work.

SMITH: This is officially known as supply-side economics, although people who are not in favor of it often call it trickle-down economics. Whatever the name, Kansas was all in. The law was passed. The experiment was underway.

CHACE: Now, going to zero is a really big change. I wanted to see what it was like for these much-vaunted small businesses. So everywhere I went in Kansas, I would go into places and ask them about it. Take this guy Alex Harb, Kansas' Small Business Person of the Year. He's just starting up his second business in Wichita - a restaurant.

ALEX HARB: It's beef and chicken shawarmas, falafel sandwiches, hummus salads. We have the Mediterranean salad, the fattoush salad, you know, no preservatives, no fat. And it's healthy and it's fresh and it's delicious and it's inexpensive and it's fast (laughter).

CHACE: Alex Harb moved to Wichita from Lebanon 14 years ago. He already runs a computer retail and service shop, a Golden Corral franchise in Missouri, and now he runs Meddys. This is the first of his many planned shawarma spots. He made me order all the shawarmas that were available - beef, chicken and falafel.

HARB: Hey, Jason. Where is Jason? Can you take her money, please?

CHACE: He said he didn't even know he was going to get this big tax break.

HARB: You know, I honestly didn't really believe it so I called my accountant. His name is David Jabara. He's an awesome guy. He said, yeah, you're not going to have any taxes - pay any taxes, you know, next year, so I was like great, awesome.

CHACE: Alex's first move was exactly what Brownback had dreamed that it would be. Alex took his tax cut money and he invested it into his business - his computer business - Ribbit Computers.

HARB: We added more iPads into to our inventory with that money, you know.

CHACE: You got a bunch of iPads?

HARB: (Laughter) Yes. We didn't really focus on selling iPads at Ribbit Computers so, you know, we added more iPads.

CHACE: So this is the first step in the Brownback experiment - the reinvestment. Across town, the same thing happened. Gary Mason is the CEO of this company iSi Environmental. They clean up things like graffiti, he says, or toxic waste. And he knew the tax cut was coming, and he knew what he was supposed to do with it.

GARY MASON: It did free up some more money to allow us to go buy more equipment. Which in turn, if we leverage that, can hire more people, so it kind of snowballs on itself.

CHACE: Gary Mason bought a power washer, a very powerful power washer - $80,000. It cuts through concrete.

MASON: It's very, very high pressure. Matter of fact, we got contacted by a party yesterday to go cut something off a bridge tomorrow.

CHACE: So this was all working theoretically as it should. Businesses are reinvesting, and with that investment, they will do more business and then also theoretically hire people. Mason says he's going to hire. Theoretically that new guy could go down to Alex's store and buy an iPad with his new fancy salary. That generates new revenue for the state that they wouldn't have gotten otherwise. And that is what economic growth is - increased spending, increased hiring. And that's not really happening, at least at the shawarma level of the economy.

Did you hire anybody?

HARB: Not really, not really because you hire people based on - not based on how much money you have, based on your business, so it didn't really have immediate help on the business. I didn't really notice any more business purchasing, you know, around here, so didn't really trigger anything to hire more employees.

CHACE: Yeah. Alex is not the only one to notice that business hasn't really picked up yet in Kansas. After the tax cuts, revenue to the state budget started to drop very dramatically. It's obvious when you think about it that if you give someone a hundred dollar tax cut and they spend that money, the state only gets $6.15 back in sales tax. The State Budget Office, they knew there would be a shortfall, but they thought it wouldn't be that bad. They projected revenues would fall by $300 million. In fact, state revenues fell by twice that in the first year. After the tax cut, the state was bringing in $600 million less than they had before which is a big difference. To balance the budget, Kansas spent down its reserves and tapped into the highway budget. The experiment was not really going according to plan, at least as the plan had been laid out. It was not the shot of adrenaline to the Kansas economy that the governor had been talking about. And some people in Kansas started to really worry about the future of the Kansas budget, especially people who ran schools.

GLEN SUPPES: We've watched this as educators. We're watching this train run into a wall, and we're all sitting here watching it.

CHACE: Like lots of other school superintendents, Glen Suppes decided to make some cuts in his district. And there was one really obvious thing to cut - a whole school, this one school in the tiny town of Marquette right in the middle of Kansas. Last February, all the school's parents met in the gym and watched the school board vote on this cut.

SUPPES: There was silence before the motion. No one wanted to give the motion. They knew what they needed to do. They thought about it many times before that night. That was the worst moment. I believe there was another long period of uncomfortable time when - before the second to the motion was made. And as that happened, then the board voted and the building was officially closed that night.

CHACE: I went out to Marquette to see the town without a school. It's kind of in the middle of nowhere. There's this grain elevator, Main Street, a restaurant, a bar and a very nice, very empty school building. If you look through the window, you can still see some of the instruments the band used inside. The xylophone and the timpani are just alone in a dark room, it's a little bit creepy. Driving around the town, it does seem like a really small place. Turns out, the school had only 65 kids in it. Now those kids split up at a bus stop every morning, takes them 10 to 20 miles out of town to go to school. And in a tiny town like this, 65 people leaving it every day is a big deal. I found that out at the grocery store. Steve Piper is the owner. He was cooking pulled pork on the smoker outside.

That looks so good.

STEVE PIPER: Then I had ribs around the whole thing earlier. This one was full of ribs too earlier, so...

CHACE: Steve's a round, bald guy wearing an apron. This is the kind of guy that was supposed to benefit from the Brownback tax cut, but the one school in town closing? That was a way bigger deal for him.

PIPER: For a business owner, you're better off having those teachers and those jobs here in Marquette, that they then shop in town and help you out that way versus having, you know, lower tax. Well, if you're not making any money to start with, taxes mean nothing. Ff your sales are down, taxes mean nothing to you, so...

CHACE: 'Cause it's a percentage of a smaller amount, right?

PIPER: Right, yeah.

CHACE: If you lose someone like this, you might lose the election. This is the guy that Brownback was aiming at - tax cut, small business expansion, not small towns shriveling up and dying and businesses closing up.

PIPER: Maybe the time that I want to sell my store, is it going to be worth anything? Is anyone going to want to move to Marquette and buy a small-town store without a school in town?

CHACE: This has been a problem in rural Kansas for a long time, the one school in town closing. Marquette is surrounded by ghost towns, places that lost their schools and then the town went away. This school probably would have closed at some point, but because of the big experiment everyone in town is pointing to Brownback, blaming the tax cuts.

There is a sense that Kansas is actually falling behind economically, and the statistics so far bear this out. After the tax cut, there was not a flood of new residents and businesses into Kansas. Other states that border Kansas are actually growing faster, creating more jobs, even with their higher tax rates.

Sam Brownback is in an interesting situation. He did what he believed in. He has not backed away from his theory. He says, look, we are poised to grow and we have created 55,000 private sector jobs. And Kansas is getting jobs, just more slowly than people maybe thought that it would. Brownback says if he is re-elected, he is going to stick with this plan. He's going to keep cutting income taxes all the way down to zero. I asked Arthur Laffer, the famous economist behind the experiment, what he makes of this tough situation for Governor Brownback.

Isn't the point of the policy to create more revenue and more growth?

LAFFER: Yes, but it's not in the first hour, I'm sorry. It takes people a long time to adjust to a -new tax codes. It takes a long time, and that's why I do all of my work over a decade and look at what the results are over long periods of time, which is what a governor should do when he governs or she governs a state, and to expect that to occur in the first year is nonsense.

CHACE: Of course, no governor is elected for 10 years. Experiments and politics, they have four years to work, four years and there's a verdict. Sam Brownback's verdict has arrived. Election Day is in two weeks, and right now the race is too close to call.

HELM: Hey, it's Sally. That race was in November of 2014 and Sam Brownback won. He won by a really small margin. He got 49 percent of the vote, and the Democrat he was running against got 46 percent of the vote. Tut that was enough, he had four more years to keep going with his experiment. I called up Sam Zeff, he's a reporter at KCUR in Kansas City, he covers politics and education. I asked him how things are going now, and he said not well.

SAM ZEFF, BYLINE: It's dire. It's serious. People are worried because the state is right now facing a billion dollar deficit over the next two fiscal years, and they've been searching couch cushions all over the state trying to find any nickels and dimes they can to balance the state budget.

HELM: There has been job growth in Kansas, he said, but it's been slower than in neighboring states. And Sam Brownback?

ZEFF: Sam Brownback is the least popular governor in America.

HELM: Brownback gave his State of the State Address on January 10, and he said he is sticking with his plan to cut taxes. But it seems like at least some people in Kansas are getting a little sick of that plan. At the elections in November, a lot of Brownback allies in the legislature lost their seats. The legislative session began on Monday and the state legislature has already introduced a bill to end some of the Brownback tax cuts. The governor has two more years to see if his plan will work. His term ends in 2018.

(SOUNDBITE OF BOO HOWARD AND DAVE ELLIS' "NOTHING IN BETWEEN")

HELM: Do you know of some other plan that might have had unintended consequences, maybe something at your job, something that happened in your town? We want to hear about it. As always, you can email us - planetmoney@npr.org or find us on Facebook or Twitter. This show was originally produced by Phia Bennin. Today's update was produced by me. I'm Sally Helm. Thanks for listening.

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