Kentucky Should Not Follow Kansas Down the Income Tax Cutting Road
November 28, 2016
Four years after Kansas began its “real live experiment” cutting taxes for wealthy and powerful interests, the damaging consequences – including a deeply underfunded education system, college tuition hikes, crumbling roads and bridges and three credit rating downgrades – provide a timely warning for Kentucky: this is not a path we should go down.
And yet the hints our leaders have provided about the kind of tax changes they might push for, as well as outside influence from defenders of trickle-down economics, raise concerns there could be attempts to follow the example of states like Kansas, North Carolina and Louisiana. Ideas like lowering income tax rates for high earners and corporations, providing new tax breaks for profitable industries and repealing the inheritance tax would leave us with an even more upside-down tax system (one that asks the least of those with the most and vice versa) and with less to invest in the things we all need to thrive.
Kansas’ March to Zero
In 2012, Kansas lawmakers passed a tax overhaul bill that, along with other changes since then, has sharply reduced the state’s income tax revenue. The “march to zero” – referring to Governor Brownback’s plan to phase the income tax all the way out – started by collapsing and reducing the state’s 3 income tax rates at 3.5 percent, 6.25 percent and 6.45 percent into 2 rates at 3 percent and 4.9 percent. Legislation in 2013 phased in additional cuts over the next 5 years to 2.3 percent and 3.9 percent by 2018, with a new formula set to go into effect in 2019 which will reduce rates further as other revenue grows.
Another component of the 2012 tax overhaul was an exemption for business income that individuals receive from “pass-through” entities. Because existing firms could restructure to take advantage of this loophole, in 2013 there was a surge in the number of registered pass-through entities in Kansas – 140,000 more than were predicted. In light of Kansas’ lackluster economic performance and revenue growth since 2012, it seems that rather than stimulating entrepreneurial activity, the pass-through exemption has encouraged tax avoidance.
As a result of these cuts, revenue from income taxes in Kansas fell by $700 million from $2.9 billion in 2012 to $2.2 billion in 2014 – or by 12 percent of their $6 billion state budget. In a series of budget crises since then, receipts have continued to fall short of forecasts, leading to budget cuts and fund sweeps, as well as tax increases on other revenue sources. In 2013 the state raised the sales tax from 5.7 percent to 6.15 percent and then again in 2015 up to 6.5 percent. The second hike was part of a package that also added 50 cents to the cigarette tax, regressive tax changes estimated to generate $176 million and $41 million, respectively, toward a $400 million budget gap. Overall, taxes on Kansan families and individuals in the lowest 20 percent of incomes have gone up by $197, while the top 1 percent has received a $24,632 tax cut.
Though trickle-down economics would suggest such cuts at the top eventually pay for themselves by stimulating the economy, Kansas is doing poorly. According to data from the Bureau of Economic Analysis, since the cuts went into effect in 2013, total nonfarm employment in Kansas has grown by 2.4 percent – about a third of the US average (7.1 percent) and less than half of the growth in Kentucky (5.2 percent). Likewise, the GDP in Kansas has grown by 4.6 percent (Q1 2013 – Q1 2016), nationally by 11 percent and in Kentucky by 8.6 percent.
In addition, an economic index from the Federal Reserve Bank of Philadelphia – which includes non-farm employment and wage and salary disbursements, for instance – put Kansas in very last place among states for its performance over the previous three months. The state also has the dubious distinction of being one of five states with the biggest decreases in per-pupil funding since the Great Recession. Compounding the debt Kansas’ children are inheriting, three credit down-grades make it more expensive for the state to borrow and invest in their future.
Drawing the Right Lessons from Kansas’ Failed Experiment
Shifts away from income taxes don’t pay for themselves, and there are common-sense reasons why:
- Lowering income taxes is not the way to attract people to Kentucky. Data show that few people migrate anyway, and when they do, it’s for other factors like a job, family or climate – not taxes. This is especially true for wealthy people.
- Few individuals – less than three percent – employ others, meaning individual income tax cuts are poorly targeted to potential job creators.
- Since income tax cuts benefit the wealthiest the most – people who are less likely to spend extra money than low-and middle-income people who spend additional income meeting basic needs – income tax cuts are also poorly targeted to stimulate economic demand.
- Shifting away from income taxes means increasing tax responsibility from low- and middle-income families. Replacing just one penny of our income tax rate with a penny more on the sales tax rate would increase the average tax payment by families in the lowest 20 percent by $59 and the middle 20 percent by $61, while providing a $5,396 tax cut to the top 1 percent.
- And since state corporate income taxes are a very small portion of business expenses, they are not a big factor in where businesses decide to locate or how many people they decide to employ.
Another big problem with tax cuts for the wealthy is that, in an economy where incomes are soaring for those at the top while everyone else is left behind, shifting from income to consumption taxes is a sure recipe for sluggish revenue growth – and even higher sales tax rates down the road.
The lesson from Kansas is that tax cuts for the wealthy are not the path to prosperity. Instead, they undermine the foundations of a stronger state.