Home > Uncategorized > Yet Another Way Kansas’ Tax Reform Was an Epic Failure… But the GOP and Trump Haven’t Learned

Yet Another Way Kansas’ Tax Reform Was an Epic Failure… But the GOP and Trump Haven’t Learned

Yesterday’s NYTimes featured an article by Jim Tankersly whose title, “Kansas Tried a Tax Plan Similar to Trump’s. It Failed“, tells the story in a nutshell. I’ve blogged frequently about the most straightforward parts of the GOP tax cut plan in Kansas that their Governor, Sam Brownback, sold to the public as a means of giving their state’s economy a shot of adrenaline. Governor Brownback insisted that if the corporate tax rates were cut that businesses would flock to Kansas and the rising tide would lift the tax revenues despite the corporate cuts. Mr. Tankersly’s article focuses on another more nuanced element of the tax plan that Governor Brownback and the state GOP insisted would increase revenues: a tax cut that eliminated state income taxes entirely for pass-through entities AND a reduction in the top individual income tax rates, cutting them to 4.9 percent from 6.4 percent. As Mr. Tankersly notes, it didn’t work out that way:

The tax package reduced state revenue by nearly $700 million a year, a drop of about 8 percent, from 2013 through 2016, according to the Kansas Legislative Research Department, forcing officials to shorten school calendars, delay highway repairs and reduce aid to the poor. Research suggests the package did not stimulate the economy, certainly not enough to pay for the tax cut. This year, legislators passed a bill to largely rescind the law, saying it had not worked as intended.

And while the entire $700,000,000 loss in revenue was not all the result of the elimination of the pass through entities, it WAS a major factor and it DID widen the economic divide:

The pass-through exemption was responsible for $200 million to $300 million of that annual shortfall, according to budget researchers at the Tax Foundation in Washington. Between 2012 and 2015, the total number of Kansans claiming pass-through income grew 20 percent, to about 393,000 from about 330,000. A team of researchers from the University of South Carolina and other institutions who studied the impact of the tax change found the top 2 percent of Kansas earners reaped the largest gains from shifting income to pass-throughs.

And while the pass through exemption was accessed by only the most affluent Kansans, if it were expanded at the federal level more wealthy taxpayers would use it to avoid taxes since the stakes are so much higher.

“I’m not going to go through the hassle of reclassifying myself just to save $10,” said Joseph Rosenberg, a senior research associate at the Tax Policy Center in Washington. “I’m only going to do it if there’s a payoff, and the 10 percentage points would make a difference for me.”

Mr. Rosenberg and two colleagues estimate that such shifts could reduce federal revenues by at least $41 billion a year. Most of that, $39 billion, would come from existing pass-through owners paying lower taxes. The rest would come from wealthy individuals routing income through pass-throughs to minimize taxes.

Those who advocate for these tax changes that will reduce revenues see the loss of revenues and the resulting cuts as a feature and not a bug. Indeed, the Grover Nordqvist libertarian wing of the GOP believes the only reason KS tax cuts failed to stimulate the economy was the legislature’s failure to make the cuts needed:

Defenders of the Kansas experiment say that the pass-through cut led to more new businesses forming, while modestly raising growth at a time when the state’s key industries — aerospace, agriculture and energy production — were faltering.

They say that the state’s budget woes came from lawmakers’ unwillingness to impose spending cuts alongside the tax cuts, and that it was never realistic to expect the tax cuts to produce enough growth to pay for themselves.

“Those are effusive political hopes — that’s not economic analysis,” said Dave Trabert, the president of the Kansas Policy Institute, a free-market think tank.

It appears today that the Trump/GOP tax reforms are not going to happen because they involve the elimination of too many deductions that middle class taxpayers rely on… but when the GOP legislators start getting phone calls from their donors telling them that they might face a challenge from the right in their districts they might have a change of heart. If they do, the nation, like KS, should expect shortened school calendars, delayed highway repairs and reductions in aid to the poor…. and no economic shot in the arm.

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