“What’s measured, improves.”
So said management legend and author Peter F. Drucker about the value of using metrics to define specific objectives within an organization.
Drucker is no longer with us; if he were, he might want to have a few words with Gov. Sam Brownback, R-Kansas. Brownback, despite promising to measure the results of a “real life experiment” in cutting taxes, has decided to cancel a quarterly report on the status of the state’s economy.
Although Brownback’s spokeswoman said “a lot of people were confused by the report,” no one has been fooled. The problem was that the reports didn’t match the governor’s predictions for the state’s soon-to-be-booming economy. Local news media, including the Topeka Capital-Journal and the Kansas City Star, flagged the abandonment of the reports as not only evidence of policy failure but an attempt to hide that fact from the public.
A quick refresher: In 2010, Brownback, a U.S. senator, ran for governor on an economic platform created by the American Legislative Exchange Council, a conservative group that specializes in promoting draft legislation. He promised to slash taxes on business owners and lower personal income tax rates, unleashing an economic renaissance in Kansas.
In May 2012, he signed the bill into law. It initially lowered the top personal tax rate to 4.9 percent (it’s now 4.6 percent) from 6.45 percent, but most importantly, it eliminated income tax on profits for owners of limited liability companies, subchapter S corporations and sole proprietorships.
Give Brownback credit for passing the exact legislation he had promised.
The results, however, haven’t been very encouraging. Indeed, since the tax cuts were passed, almost nothing has gone as promised in Kansas. Revenue plunged and the state resorted to pulling money out of its rainy-day fund to plug the holes. A number of critical services, including for road maintenance and schools, were cut. The business climate has been poor, and the economy has lagged behind neighboring states as well as the rest of the country.
Why hasn’t this worked out? The failure of the Kansas tax cuts to do what was promised is a simple combination of state budget math and human psychology.
The math is simple: Tax cuts tend to reduce revenue, in Kansas’ case much more than expected. To change people’s behavior requires more substantial incentives than changing things by a few percentage points. The reduced revenue led to spending cuts that lowered quality of life. In response, rising numbers of people and companies have left the state.
To understand how people react to economic incentives and disincentives, consider U.K. tax rates in the 1960s and ’70s. The top standard rate was 83 percent with a 15 percent super tax on high earners and a rate of more than 90 percent on unearned income. No wonder the Rolling Stones, the Beatles and other British musicians became tax exiles, moving to Switzerland, Brazil, Monte Carlo, the Netherlands, Luxembourg and the British Virgin Islands. Those damaging and confiscatory rates have since been reduced in much the same way that similarly economically harmful rates were cut in the U.S., most famously under Ronald Reagan.
Meanwhile, just consider what Brownback did. The elimination of taxes on pass-through income simply benefited existing business, many more of which took advantage of the change than expected. And really, who is going to move to Kansas now that the top personal tax rate is 4.6 percent versus 6.45 percent? I can tell you I’m not packing up the U-Haul.
Brownback had asked his Council of Economic Advisors to report to him to measure the impact of the tax cuts — likely because he expected good things. His critics have delighted in pointing out that the quarterly report was cancelled after it showed the opposite economic effect of what Brownback had promised. “He specifically asked the council to hold him accountable through rigorous performance metrics,” Heidi Holliday, executive director of the Kansas Center for Economic Growth, told the Topeka Capital-Journal.
A summary of the Brownback record shows:
– Kansas’ gross state product fell behind the six-state region and the nation for the third straight year. (Kansas’ gross state product grew at a faster rate when compared to the region and the nation in three of the five years before Brownback took office in 2011).
– Private industry wages in Kansas grew at a slower pace last year than they did in the region and the U.S. — as they did during the past five years.
– The number of private business establishments in Kansas trailed both the region and the nation for the last year, again continuing a five-year trend.
By just about every measure, Kansas’ tax experiment has failed to meet the promised performance objectives. Killing the quarterly report won’t change this. If anything — if what Drucker said is right — ending the reporting may make things worse.
Brownback is now said to be considering tax hikes. He has paid the deserved price for his errors, with a 26 percent approval rating, the lowest of any governor in the U.S. The people of Kansas have paid a bigger price. Undoing the harm will take a new governor and, though it may seem far-fetched, I think he should step down and make way for fresh leadership.
Absent that, all we can do is to call out misguided economic beliefs wherever they appear.
_ Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm.