Cronyism

An Open Letter to Kansas Lawmakers: All Taxes Hinder Economic Growth…But Some Taxes are Worse Than Others

On May 20, 2015, ALEC CEO Lisa B. Nelson and Vice President of the Center for State Fiscal Reform Jonathan Williams distributed the following letter to lawmakers in the Kansas State Legislature:

Dear Kansas Lawmakers,

As the last few days of your session near, we wanted to reach out and reinforce a few key principles held by the American Legislative Exchange Council (ALEC). We are sorry to have missed you at our recent Spring Task Force Summit in Savannah, Georgia but we understand that you are busy serving your constituents and we wish you all the best.

Kansas lawmakers should be applauded during the 2012 tax reform for taking major steps to reform the state’s tax structure and make Kansas more competitive. We believe your Kansas tax reform measures are some of the boldest tax reforms across the states during the past decade. As a state on the forefront of pro-growth tax reform, and with the rest of the nation watching, we hope Kansas will not backtrack on its momentous achievements.

Since the 2012 tax reform package many other states have taken up the economic competitiveness challenge. In 2013, 17 states significantly reduced taxes[i] and in 2014, 14 states significantly reduced their state taxes.[ii] These states included most of Kansas’ neighboring states, with Oklahoma, Nebraska and Missouri all enacting net tax reductions in those years—in many cases, these measures were passed to keep up with the historic Kansas reforms. States do not create policies in a vacuum. Likewise, rolling back pro-growth tax reform while neighboring states pass tax relief measures would jeopardize the progress that Kansas has made.

In March of 2013, Kansas’ unemployment rate was at 5.5 percent. It has since moved to a tie for 14th lowest in the nation at 4.2 percent. [iii] In the Kansas City Metro Area, private sector employment on the Kansas side has grown by 5.6 percent and by just 2.2 percent on the Missouri side. These improvements are coupled with rising wages and new business formation. [iv] In late 2014, a report from Creighton University noted that Kansas hourly wages increased by 4.82 percent since the fourth quarter of 2012, nearly four times the national average.[v] The report concludes that “Kansas job and income data since the tax cut show that, except for Colorado, the state economy has outperformed, by a wide margin, that of each of its neighbors and the U.S.”[vi]

However, as budget realities need to be addressed, the spending side of the fiscal coin is a good place to start. ALEC has conducted non-partisan research on how states can make government more efficient. In the State Budget Reform Toolkit,[vii] case studies and policy options are examined that allow the state to maintain core services of government at a lower cost. One example is to eliminate positions in state agencies that have been vacant for more than six months, or to adopt a sunset review process for state agencies, boards and commissions. These examples and many more can be found on our website for your review.[viii]

If budget gaps simply cannot be feasibly addressed by spending reductions, the question of finding an appropriate revenue source should be approached carefully. All taxes hinder economic growth at some level, but some taxes are worse than others. Generally, taxes on capital, such as on personal income, business income or capital gains, are much more destructive to economic growth than are broad-based taxes on consumption.[ix] Since taxes on personal income and capital gains provide a disincentive for production or work, broad-based taxes on consumption are much preferred. Broad-based consumption taxes can be a disincentive toward general spending, but they do not affect the incentive to work and save. Savings, investment and work are the real drivers of economic growth.

Additionally, Kansas is in a unique position in that a key provision of the 2012 tax reform plan disproportionally affects the state’s small businesses. The exemption of non-wage income for pass-through entities is a cornerstone of the 2012 tax reform and spurred a movement of pass-through businesses into Kansas, as well as the creation of new pass-through entities within the state. All this was predicated on the understanding that they would be able to keep non-wage income tax free and use that capital to grow their business. Changing such an important provision would harm one of the most important economic sectors—small business—and violate the tax principle of reliability. The ALEC Principles of Taxation describe the principle of reliability well:

A high quality tax system should be stable, providing certainty in taxation and in revenue flows. It should provide certainty of financial planning for individuals and businesses.[x]

Another important principle of taxation that should be considered in the context of potentially raising revenue is the economic principle of economic neutrality. The role of taxes is to collect the necessary revenue to fund the core functions of government. Singling out specific industries, such as tobacco, electronic cigarettes, fuel or alcohol, would not only be in violation of the principle of economic neutrality, but would likely be a poor choice for collecting revenue. Neighboring Missouri has the lowest cigarette taxes in the country and also has lower excise taxes than Kansas on spirits and beer.[xi] Raising these targeted taxes would likely not produce the revenue projected as more individuals purchase these products in neighboring Missouri at a cheaper price.

Ultimately, the tax code should not be used to interfere with personal choices that should be left to the individual. The tax code should not be used to pick winners and losers. The principle of economic neutrality from the ALEC Principles of Taxation is as follows:

The purpose of the tax system is to raise needed revenue for core functions of government, not control the lives of citizens or micromanage the economy. The tax system should exert minimal impact on the spending and decisions of individuals and businesses. An effective tax system should be broad-based, utilize a low overall tax rate with few loopholes, and avoid multiple layers of taxation through tax pyramiding.[xii]

Overall, Kansas has successfully implemented some of the best pro-growth tax reforms in recent memory and you as legislators should be commended for these reforms. The results are positive and will only continue to improve over time. The state’s fiscal future is bright and the potential for economic growth is stronger than it has been in decades. Hopefully, backtracking on these achievements is something that can be avoided. But if budget realities force some uncomfortable choices, there are some policy options that would be less destructive to economic growth and allow budget needs to be met while preserving the pro-growth spirit of the hard-fought tax reform efforts.

ALEC remains committed to its principles and our economic research is based around promoting the maximum amount of economic growth. A focus on broad-based consumption taxes over narrow sin taxes or repealing of the pass-through income exemption would reassure companies and individuals in Kansas and companies and individuals considering a move to Kansas that the state is still open for business.

We wish you the best of luck in fulfilling your duties as state legislators—we know it is not easy to govern. Focusing on the economic competitiveness of Kansas prompted some of the decade’s boldest reforms and that focus on competitiveness is important to ensuring a prosperous future for Kansas. Your leadership in the 2012 tax reform was noted by the rest of the nation and your choices now will be watched with equal suspense.

Sincerely,

Lisa B. Nelson                                                         Jonathan Williams
Chief Executive Officer                                         Vice President, Center for State Fiscal Reform

[i] Williams, Jonathan and Wilterdink, Ben. “State Tax Cut Roundup: 2013 Legislative Session.” American Legislative Exchange Council. November 2013. http://www.alec.org/wp-content/uploads/2013-TaxCutRoundup.pdf

[ii] Williams, Jonathan and Wilterdink, Ben. “State Tax Cut Roundup: 2014 Legislative Session.” American Legislative Exchange Council. December 2014. http://www.alec.org/wp-content/uploads/2014-TaxCutRoundup.pdf

[iii] Wilson, Andrew B. “Seeded With Tax Cuts, Kansas Harvests the Benefits.” Wall Street Journal. May 15, 2015. http://www.wsj.com/articles/seeded-with-tax-cuts-kansas-harvests-the-benefits-1431729743?KEYWORDS=%22tax%22

[iv] Ibid.

[v] “The Mainstreet Economy Report.” Creighton University. October 2014. http://business.creighton.edu/sites/business.creighton.edu/files/basic-page/MSE_Oct14.pdf

[vi] Ibid.

[vii] Gilroy, Leonard and Williams, Jonathan. State Budget Reform Toolkit. American Legislative Exchange Council. 2011. http://www.alec.org/publications/state-budget-reform-toolkit/

[viii] http://www.alec.org/publications/state-budget-reform-toolkit/

[ix] McBride, William. “What is the Evidence on Taxes and Growth?” Tax Foundation. December 18, 2012. http://taxfoundation.org/article/what-evidence-taxes-and-growth

[x] Tax and Fiscal Policy Task Force, “ALEC Principles of Taxation.” American Legislative Exchange Council. June 3, 2010. http://www.alec.org/model-legislation/statement-alec-principles-of-taxation/

[xi] Walczak, Jared. “Facts & Figures.” Tax Foundation. March 10, 2015. http://taxfoundation.org/article/facts-figures-2015-how-does-your-state-compare

[xii] Tax and Fiscal Policy Task Force, “ALEC Principles of Taxation.” American Legislative Exchange Council. June 3, 2010. http://www.alec.org/model-legislation/statement-alec-principles-of-taxation/


In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure …

+ Cronyism In Depth