Ever since enacting tax reform in 2012, Kansas’ efforts have received more media attention than any other state-level tax relief effort in recent memory. While the prevailing media narrative is overwhelmingly negative, like a recent Bloomberg View column by Barry Ritholtz, the data from Kansas does not support many of the arguments these critics make. In reality, the Kansas tax relief is far from the abject failure some like to suggest. In fact, recent data suggest there are some very positive trends for hardworking taxpayers in Kansas.
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 the fiscal policy patchwork that Kansas taxpayers face. Taxes were lowered, but spending was not. Then taxes were raised in a significant way. Some of the tax increases came in the form of broad-based retail sales taxes, while others were discriminatory taxes on consumers of specific products, such as cigarettes.
According to Ritholtz, “The results have been disastrous for Kansans” and, “Massive budget shortfalls, huge cuts to basic services such as road maintenance, and slashing of education budgets became annual events.” Let’s take a MythBusters-style look at these factually-challenged arguments and set the record straight.
First, the Kansas economy is not facing a disaster as Ritholtz suggests. Michael Austin, who serves as chief economist at the Kansas Department of Revenue, recently announced that Kansas enjoyed record-high private sector employment in 2016. Additionally, business startups continue to break records since tax reform was enacted in 2012. The 2012 record was broken in 2013, and again in 2014. New business filings set another record in 2016 with 18,147 new domestic business filings.
The exemption on pass-through income has been one of the most debated elements of the Kansas tax changes, but also produced strong growth. Employment at pass-through companies grew by just 2.4 percent in the two years prior to tax relief but then jumped by 8.4 percent in the two years following. That 250 percent change in growth rate was far greater than the national average and the 36,135 new pass-through jobs accounted for 82 percent of private sector job gains in those two years. Taxes matter for growth.
Dave Trabert, president of the non-partisan Kansas Policy Institute recently analyzed data from the federal Bureau of Economic Analysis and found: “Over the 14 years leading up to 2012, private sector jobs grew by 6.3 percent and that growth rate ranked 41st among the states. But in the three years since income taxes were reduced, Kansas’ growth of 4.8 percent was ranked 31st among the states after adding 74,289 more jobs over the period.” BEA data is important because unlike the Bureau of Labor Statistics, they count proprietors in their job totals—one of the beneficiaries of the pass-through exemption.
Also contrary to Ritholtz, slashing education budgets has not been “an annual event” in Kansas, not even close. The Kansas Department of Education reports per-pupil funding increased from $12,283 in fiscal year 2011 (Brownback’s first year) to $13,025 last year.
And to the ludicrous claim that “a tax cut of only a few percent” is doubtful to “nudge people to make big new investments or hire workers,” one need look only to the substantial bulk of academic literature and some old-fashion common sense that show the opposite.
Individuals and businesses make economic decisions at the margin. Supply decisions are seldom all-or-nothing efforts. The tax rates that affect such decisions are the marginal tax rates, which apply to the last or next dollar to be earned from small reductions or small increases in economic activity. Therefore, raising taxes, even by a small margin, shrinks the space that economic actors have in which to act, reducing quantity of resources available for production.
Look to states like North Carolina and Tennessee, who both substantially grew economic activity and earned budget surpluses by reducing tax rates at the margin.
It is clear advocates for higher taxes and larger government are attempting to use the Kansas experience as a scare tactic with policymakers in other states. If they are successful in distorting the Kansas story, they believe it will stop pro-growth tax cuts in states across the country.
The truth behind the implementation and impact of Kansas’s 2012 tax reform is too often shrouded in misinformation and half-truths, but for those now enjoying higher growth and lower unemployment, the facts are clear—the pro-growth policies are working.
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 they take time to develop and must be offset with appropriate spending reforms.
Jonathan Williams (@Taxeconomist) is the chief economist and vice president of the Center for State Fiscal Reform at the American Legislative Exchange Council.
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