Tax Reform

What’s the Matter with Kansas Republicans?

When you travel down I-70 west from the Kansas City airport to the Kansas capital of Topeka, you pass a sign that says “You Are Entering the Land of Oz.” Well, of late, there’s a distinct “we’re not in Kansas anymore” feeling to the place, given what’s been going on in this traditionally bedrock conservative state.

Some 70 percent of the legislators in Topeka are Republicans, and the voters here went overwhelmingly for Trump. But the Kansas House and Senate are poised to pass the largest tax increase in the state’s history. This would be the third tax hike in five years. When lawmakers in the House spoke up for a billion dollar tax hike not long ago, the liberals in the chamber rose in thunderous applause. This latest revenue grab would effectively repeal Governor Sam Brownback’s 2012 income tax cuts, his signature achievement.

Brownback recently vetoed a similar tax scheme, and the tax-hike caucus came within three votes of an override. Now liberal Republicans, the dominant faction in the state thanks to massive teacher union money pumped into their campaigns, are teaming up with the few-and-far-between Democrats in the state to enact the nine-digit tax hike the left has craved for years. The conservative speaker of the House, Ron Ryckman, tells me forlornly, “I’m just trying to get the votes for the least damaging tax increase possible.”

The plan that liberals are cheering so loudly for would soak every Kansan with an income above $15,000, every small-business owner, and nearly every farmer operating in the state. If it passes, conservative Kansas will have a higher state income tax (5.3 percent) than even liberal Massachusetts (5.1 percent).

The legislature also is trying to reverse Brownback’s teacher tenure reforms that were designed to help fire bad teachers. It previously voted to expand Medicaid under Obamacare, which would drive another massive hole in the state budget after 2020, when the federal matching funds begin to shrink. Manhattan, Kansas, is starting to vote like Manhattan, New York.

Unions, liberal interest groups, and the media have made the Kansas fiscal saga a national cause célèbre, a case study in the supposed horrors of supply-side tax cuts. On CNN and MSNBC leftist commentators regularly warn that a Trump tax cut would be as ruinous for the country as Brownback’s in Kansas. The narrative runs something like this: Giant tax cuts bankrupted the state with $350 million deficits, ripped gaping holes in the safety net, and decimated funding for schools.

Republicans are worried that the middle class in Kansas has turned against Brownback and his economic ideas. The governor won reelection in 2014 despite millions of union and money spent against him, but his approval rating today, thanks to the drubbing by the media, has fallen to one of the lowest among governors. For liberal GOP lawmakers the fight has also become personal. They want payback for Brownback’s campaign to defeat eight incumbent liberal Republicans in the GOP primaries in 2012. In 2016 the teacher union war chest helped win back those seats and more. Senator Barbara Bollier admitted to the Atlantic that this blowback is a result of “the governor holding on to the old days where he had all these people [conservatives] elected.” She sounded triumphant in declaring that the tax hike she supports means Brownback’s “legacy is going down in flames.”

Meanwhile, the actual economic effects of the Brownback tax cuts have been distorted beyond recognition. It is true that the cuts haven’t been a miracle cure for the Kansas economy. The state has underperformed on jobs and growth compared with the national average, but this is in part due to steep declines in the price of oil and gas (Kansas is an energy state) and the hit to farmers from historically low commodity prices. Tax collections have fallen off and are lower than Brownback had predicted.

The heart of the Brownback tax plan was to cut income taxes by 30 percent and zero out the tax on small-business “pass through” income, so as to encourage new enterprise. This is hardly a radical idea: Eight other states—including prosperous Florida, Nevada, Tennessee, and Texas—don’t tax small-business income and have few problems paying their bills and balancing their budgets. According to an analysis by the Kansas Policy Institute, those states spend about one-third less per citizen than Kansas does, even though Kansas is a very low cost of living state.

Eliminating taxes on small-business income has lost revenue, but it has brought enterprise to the state. The Kansas secretary of state income tax return data show that the number of new business filings in Kansas has grown by roughly 23 percent since Brownback took office—to 187,000 from 145,000. Small-business pass-throughs account for 98 percent of Kansas jobs gains since 2013, which is up from 82 percent before the tax cuts. Businesses have scrambled out of Kansas City, Missouri, into Kansas City, Kansas, at such a fast clip that three years ago Missouri passed an income tax cut of its own to stop the bleeding. The Missouri legislature called for a “border war truce” to stop employers from relocating across the state line. Brownback’s critics have never been able to explain why if the tax cut is such a disaster, the Kansas unemployment rate today is one of the lowest in the nation. Despite the relentless anti-Brownback blitzkrieg, only 17 percent of Kansas voters say the income tax is the “best way” to close the income gap, according to a February Survey USA poll.

The charge that schools and state government have faced savage cuts is mostly histrionics. In 2017 per capita inflation-adjusted general fund spending in Kansas reached an all-time high and has soared 33 percent since 1997 and more than 10 percent this past decade. Brownback also had to put out unexpected fires. He inherited a severe pension crisis. He replenished the state’s retirement program with $400 million to keep the system solvent. Six years ago the state was ranked in the bottom five in pension funding; now it ranks above average.

The one glaring problem with the Kansas tax cut was that since zeroing out small-business taxes, thousands of businesses—law firms, accounting agencies, consultants—have gamed the system by declaring wage income as “business profit income” to lower tax liabilities. (Closing this scam is going to be a challenge for the White House and Congress, which also want to have a lower tax rate for small-business pass-through income.) This has cost the state tens of millions in lost tax revenue at the very time it must cope with a Kansas supreme court ruling that schools in low-income areas are underfunded. Brownback and the House speaker have come up with a smart solution. Get rid of the small-business deduction on income above $50,000 and tax all business and wage and salary income at the same flat rate of around 4.6 percent. When Brownback came into office the rate was closer to

6.5 percent.

The pro-tax contingent say they will settle for nothing less than a full repeal of the Brownback legacy. They parade around the state pretending that this will have no impact on the state economy. This experiment has been tested in nearby Illinois and in Connecticut with catastrophic results. Illinois and Connecticut both passed giant income tax hikes “on the rich” at about the same time Brownback was cutting them. Today, these two blue states are fiscal basket cases with debt levels so high their finances resemble those of a third world country. Illinois has over $12.8 billion in unpaid bills and is six to nine months behind in paying them. When just one wealthy hedge fund manager left Connecticut for Florida, it put a dent of more than $10 million in the state budget.

Yet the media and the teachers’ unions and, alas, at least half the Republicans in Topeka now think the financial salvation for Kansas is to make the state look more like Connecticut and Illinois. If they have their way, that’s exactly where the state is headed.

This article was originally published by The Weekly Standard on May 22, 2017.

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