Tax Reform

Distinguishing Myth from Reality: The Kansas Tax Reform Effort

Tax policy changes in Kansas have received more media attention than any other state-level fiscal reforms in recent memory – even though many successful pro-growth tax reforms took place in states like North Carolina during the same time period.

For years, the tax and spend crowd has desperately tried to pin Kansas’ economic difficulties on tax cuts in an attempt to deter tax reformers in the other 49 states and Washington, D.C. The data indicate otherwise. While the detractors are correct that the nation does have much to learn from the Kansas tax reforms, the real lessons are far different than those misleadingly promoted by the naysayers. An overwhelming majority of the academic evidence confirms, lower taxes – especially lower tax rates on business and personal income – indeed boost economic growth. Failure to properly prioritize spending or tackle government inefficiency continues to impact Kansas finances.

Perhaps the most important complexity to keep in mind is the Kansas tax reform plan was never fully implemented as intended. Many political compromises gave us a patchwork of fiscal policy that Kansas taxpayers currently face. Tax rates were lowered, but spending was not. Oil and agriculture, sectors that disproportionally affect the Kansas economy, faced a major downturn. The recommendations of outside experts to enhance government efficiency and produce massive budget savings were ignored. Then taxes were raised, and spending was increased, in a significant way. Some of the tax increases came in the form of broad-based retail sales taxes and income taxes, while others were discriminatory taxes on consumers of specific products such as cigarettes.

Myth: Kansas job growth suffered in the wake of the 2012 reform.

Reality: Compared with a group of eight other states with the most highly correlated private sector workforce composition, post-reform job growth has been quite competitive. U.S. Bureau of Economic Analysis (BEA) data show annualized growth of 1.3 percent per 10,000 residents from the end of 2012 through 2015 in Kansas, higher than five of those eight other states. Contrasted with the nation as a whole, Kansas exhibited marked improvement from the pre-reform era, jumping from 40th place for private sector job growth between 1998 and 2012 to 30th place from 2012 to 2015—the latest year for BEA data. Yes, the state still lags nationally, but the relative performance after the tax reform improved. Kansas trailed the national averages in economic growth for years before the 2012 reforms. That was one of the primary drivers for tax reform in the first place.

Myth:  Eliminating the income tax on pass-through entities sparked a cascade of tax avoidance switches to new pass-throughs from C-corporations.

Reality: According Kansas Department of Revenue (KDOR) Kansas Tax Policy and Economy Review, “In tax year 2013, 2 percent of C-corporations switched to pass-through entity. In 2014, 1.3 percent of C-corporations switched to a pass-through entity.” The number of total existing pass-through entities attributable to these switches from C-corps is minimal as well. Excluding sole proprietorships and counting one partner per partnership, KDOR data shows just 0.4 percent of the total number were switched in 2012, 0.65 percent in 2013 and 0.41 percent in 2014. An academic study critical of pass-through tax elimination estimated that “recharacterization of pass-through income accounted for roughly 8.6 million” of negative revenue impact in 2013 (the first year following reform). Keep in mind, the General Fund spending in 2013 was more than $6.1 billion.

Myth: Eliminating the income tax on pass-through entities dramatically increased the budget deficit.

Reality: Kansas Department of Revenue estimates the annual “cost” of the pass-through tax elimination at $211 million annually—or approximately three percent of annual General Fund spending.

Myth: Tax cuts created Kansas’ prolonged budget crises.

Reality: Over the years, politicians created a budget failure by refusing to match the tax cuts with meaningful spending control or broadening of the tax base. General Fund spending from 1995 through 2017 rose approximately 55 percent, adjusted for inflation, and a whopping 89 percent in current dollars. Population increased just 12 percent from 1995-2017. In other words, for every one percent in population growth, spending increased by nearly five percent in real terms. Since 2012, General Fund spending has increased by more than four percent adjusted for inflation since 2012. If General Fund spending growth had been held to the rate of inflation throughout this period, FY 2017 spending would be $1.12 billion less, dwarfing the predicted deficit.

Myth: Public schools suffered from the Kansas tax cuts.

Reality: 2016 data from Kansas Department of Education shows the school system still retains cash reserves of nearly $911 million, not including dollars set aside for capital outlays and debt service — $443 million more than existed a decade ago. And total state and local spending per pupil increased by 11 percent from 2011 to 2016. In fact, inflation-adjusted per pupil spending has actually increased over the past several school years.

Conclusion: It is clear that advocates for higher taxes and larger government are attempting to use the Kansas experience as a scare tactic with policymakers in other states, and those in our nation’s capital. If they are successful in distorting the Kansas story, they believe it will stop pro-growth tax reform across the country.

Much of the criticism about Kansas is based on preconception and myth, rather than empirical data and actual trends. Pro-growth tax relief can be trusted to make states more competitive, but pro-growth reforms take time to show results and importantly must be offset with appropriate spending discipline.

Additional Resources

Griffith, Joel and Masterson, Ty. “On the Kansas budget Impasse, Look Beyond the Media Hype to the Facts.” The Hill. June 3, 2017.

Williams, Jonathan and Griffith, Joel. “Lessons from Kansas: Cut Taxes while also Reducing Favoritism and Overspending.” Townhall. July 18, 2017.

Williams, Jonathan. “Despite what the media is telling you, tax cuts really do boost economic growth in the states.” Washington Examiner. March 25, 2017

VIDEO: The Repercussions of Kansas Tax Increases Weeks, Bob. Wichita Liberty TV. July 2017.

Tax Cuts and the Kansas Economy.” Trabert, Dave. Kansas Policy Institute. September 23, 2017.

In Depth: Tax Reform

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