July 6, 2017

What’s the Matter With Kansas?

Did tax cuts cause the Sunflower State’s budget woes, or was it an addiction to spending, even in the GOP?

Deeply bound in an addictive love affair with tax hikes and government spending sprees, the Left — along with which-way-is-the-wind-blowing Republicans — have pounced on the apparent “failure” of Kansas’ historic 2012 tax cuts to propagate their “spending is good, tax cuts are bad” narrative.

Five years ago, Republican Gov. Sam Brownback spearheaded the state’s tax reform, which cut the top income tax rate to 4.9% from 6.45% and eliminated income taxes on so-called “pass-through” businesses, including LLCs, partnerships, farms, sole proprietorships, and S corporations.

The promise was that the overhaul would attract businesses and encourage job growth. And in some ways, the reform delivered.

As Americans for Prosperity’s Kansas state director Jeff Glendening recently wrote, “The year the tax cuts went into effect, Kansas received over 15,000 new small business filings — a state record. That record was broken again in 2013. … The target sector of the tax cuts — pass-through entities such as LLCs — have been responsible for 54,424 new jobs since 2013, or 98 percent of private sector job growth overall.”

Why, then, are some calling the cuts a failure? And, more importantly, why did the Republican-controlled legislature recently cave to this narrative and undo much of the tax overhaul by voting — and overriding Brownback’s veto — to hike taxes by $1.2 billion over the next two years?

It seems that despite new jobs, the state is facing an estimated $900 million budget shortfall. And many are laying the blame squarely on the tax cuts … because, of course, spending is never to blame.

But what’s really casting a shadow on the Sunflower State?

The answer is twofold.

First, as remedial economics teaches, cutting revenue works best when you also cut spending — particularly if the revenue drop is sudden and any projected revenue increases from future economic growth will (understandably) take time. It’s a pretty basic principle but apparently beyond the grasp of many politicians. While revenues dropped after the tax reform, spending grew.

According to the Kansas Policy Institute, spending is expected to increase $181 million this year, $275 million next year, and $42 million the following. This continues an upward trajectory of growth that’s been rising fairly consistently (adjusted for inflation) since at least 1995.

Joel Griffith of the American Legislative Exchange Council and Kansas State Senator Ty Masterson note, “General fund spending has increased by more than 4 percent adjusted for inflation since 2012. General fund spending 1995 through 2017 rose approximately 55 percent, adjusted for inflation and a whopping 89 percent in current dollars. If General fund spending growth had been held to the rate of inflation throughout this period, fiscal year 2017 spending would be $1.12 billion less. … [F]or every 1 percent in population growth, spending increased by nearly 5 percent.”

Second, as the Tax Foundation’s Joe Henchman explains, while tax reforms in other states have eliminated special carve-outs, Kansas’ overhaul added new carve-outs for select businesses. Testifying before the Kansas House Committee on Taxation, Henchman and Scott Drenkard cautioned, “It’s important to note here that while decreasing taxes is generally associated with greater economic growth, the pass-through carve out is primarily incentivizing tax avoidance, not job creation.”

Indeed, while in 2012 it was estimated that 191,00 entities would capitalize on the carve-out, as of 2015 the number had risen to nearly 400,000, amounting to nearly $300 million per year in lost revenue without much benefit for the state’s economy.

Henchman and Drenkard conclude, “Tax reform is about broadening tax bases and lowering tax rates. This state has lowered tax rates in some spaces, but the pass-through exemption significantly narrows the tax base, and this has made for a less stable, productive, and competitive code.”

Those who drink the tax-and-spend Kool-Aid are falling over themselves to point to Kansas as “proof” that tax cuts don’t work. But the Left doesn’t exactly have a stellar track record of convincing anyone that high-tax states are economic utopias (think Illinois, New Jersey, California and Connecticut). Soaring taxes haven’t solved these states’ budget woes.

The truth is, tax cuts didn’t cause Kansas’ fiscal problems. Chronic spending hikes combined with poorly planned and executed tax reform led to the budget crunch. Instead of forcing taxpayers to bail out state government years or even decades into the future, Kansas lawmakers should double down on restraining spending and structuring a fair tax system that empowers all Kansans — not just the favored few — to create economic growth and right the ship on the state’s budget.

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