Tax Revenge in Kansas
The Kansas legislature on Tuesday overrode Governor Sam Brownback’s veto to raise taxes by $1.2 billion, and national progressives are giddy. Their spin is that because the vote reverses Mr. Brownback’s tax cuts in a Republican state that Donald Trump carried by more than 20 points, Republicans everywhere should stop cutting taxes.
The reality is more prosaic—and politically cynical. The press accounts gleefully talk of how “moderate Republicans” joined with Democrats to raise taxes to address exploding state deficits. But substitute “Republicans backed by teachers unions” for moderate Republicans, and the real picture comes into focus. At bottom the Kansas tax vote was as much about unions getting even with the Governor over his education reforms, which included making it easier to fire bad teachers.
The Kansas economy has struggled even after the 2012 tax cuts that reduced the top rate on personal income taxes to 4.9% from 6.45% and eliminated income tax for small businesses filing as individuals. Mr. Brownback was unlucky in his timing, given the hits to the agricultural and energy industries that count for much of the state economy.
But unemployment is still low at 3.7%, and the state has had considerable small-business formation every year since the tax cuts were enacted. The tax competition across the Kansas-Missouri border around Kansas City is one reason Missouri cut its top individual tax rate in 2014.
Mr. Brownback’s reform mistake was that in eliminating taxes on “pass-through” small businesses, the Governor created a loophole that allowed law firms, accounting agencies, consultants and many others to declare wage income to be business profit and pay little or nothing. This caused lower tax revenues than Mr. Brownback predicted, and bigger deficits when the legislature refused to cut spending. What do you know: Tax rates affect taxpayer behavior.
A good part of this tax increase is also personal payback. In 2012 Mr. Brownback campaigned against eight Republican incumbents who lost to more conservative GOP challengers. The losers had their revenge in last summer’s primaries, when the conservatives were ousted by Republicans backed by the teachers union. Because the GOP dominates Kansas politics, the big policy disputes occur among Republicans, and public unions support the state GOP’s liberal wing.
The upshot is that supposedly conservative Kansas will now have a higher top marginal individual income-tax rate (5.7%) than Massachusetts (5.1%). And the unions will be back for another increase as spending rises to meet the new greater revenues. This is the eternal lesson of tax increases, as Illinois and Connecticut prove.
Democrats would love Republicans to abandon rate-cutting or reform. Then they can fight over whether to raise taxes on the rich. The one relevant Kansas lesson is that Republicans in Washington need to be careful how they write any tax reform for “pass-through” businesses. One way to do that is to avoid letting pass-through tax rates get too much lower than rates on wage and salary income. Meanwhile, don’t be surprised if Kansas voters punish the tax-raising Republicans in 2018.
Appeared in the June 10, 2017, print edition.