Cronyism

Kansas Tax Cuts: Don’t Buy the Spin

Almost two years after some of the country’s most significant state-level tax reform was passed in Kansas, misinformation about the tax cuts and their economic effects still abounds. While left wing election year strategists lambast the Kansas tax cut package as a poster child for poor economic policy, the data provides some inconvenient truths.

Economic evidence suggests the tax cut package has actually been a boon for the state’s economy. Personal income growth in Kansas is outpacing the national average. The unemployment rate in Kansas is improving relative both to how the state performed before the tax cuts and compared to other states. And, despite alarmism in the media, the tax cuts have caused no economic devastation.

For those just tuning into this debate, a little background might be helpful. In 2012, Governor Brownback signed a tax cut package into law that included several key points:

  • Simplified Kansas personal income taxes from a three-tiered system to two
  • Reduced the top tax rate (on income over $15,000) from 6.25 percent to 4.8 percent
  • Reduced the tax rate on income below $15,000 from 3.5 percent to 2.7 percent
  • Exempted non-wage personal income from taxation entirely; effectively eliminating income taxes for pass-through businesses

Few tax cuts have sparked as much controversy and media hysteria as those passed in the 2012 Kansas legislative session. Some in the media bent over backwards to demonize the bold tax cuts (see Paul Krugman’s Charlatans, Cranks and Kansas). The American Legislative Exchange Council (ALEC) has written about these hyperbolic claims on several occasions to correct the record, but the misrepresentations about these cuts and their economic impact persist. Rather than succumbing to media fanfare, we should examine the results of the tax cuts in the short time they have been in effect.

Creighton University is out with its October 2014 edition of The Mainstreet Economy Report and details some positive results of the Kansas tax cuts, especially in terms of personal income growth. Since the fourth quarter of 2012, Kansas has experienced a growth rate of 2.92 percent in personal income, beating out the U.S. average of 2.85 percent and outperforming all of its neighbors except Colorado. Tellingly, Colorado is the only neighbor of Kansas that maintains a lower personal income tax rate (a flat 4.63 percent). The Mainstreet Economy Report also discusses average weekly earnings:

Addition-ally [sic] in terms of average weekly earnings, Kansas experienced an increase of 4.82% which was almost four times that of the U.S., more than four times that of Missouri, approximately seven times that of Nebraska, and nearly four times that of Oklahoma. Of Kansas’ neighbors, only Colorado with 4.82% average weekly wage growth outperformed Kansas.

The report concludes with a bold prediction about Kansas’ neighboring states, saying 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. To remain competitive, expect Kansas’ neighbors to reduce state and local taxes in the years ahead.”

Kansas’ job growth and unemployment rate compared to the national average and its neighbors is another good indicator of the benefits of the tax cuts. In a post from earlier this year, Will Upton of Americans for Tax Reform takes a look at the unemployment rate in Kansas as compared to Missouri:

Kansas began in January, 2012 with a rate of 6.1% and finished out the year at 5.4%. Missouri began 2012 at 7.5% and finished out the year at 6.7%. However, in 2013 after the 2012 Kansas tax cuts had kicked in, the two states diverged. Kansas continued to reduce their unemployment rate, dropping from 5.5% in January 2013 to 4.9% in December. Missouri, on the other hand, saw their rate fluctuate – beginning the year at 6.5%, then climbing to 7.2% in August of 2013 before finally seeing a drastic drop in December to 5.9% (partially due to holiday hires in the retail sector – note: this applies to Kansas as well).

The most recent unemployment data from the Bureau of Labor Statistics lists Kansas’ unemployment rate at 4.8 percent while Missouri sits at 6.3 percent. It is worth noting that the 4.8 percent unemployment rate in Kansas is far better than the national unemployment rate of 5.9 percent.

While these results may seem impressive in their own right, bear in mind that for years Kansas lagged behind other Great Plains states and the nation economically. From 1982 to 1997, Kansas ranked 43rd in the nation for private Gross Domestic Product (GDP) growth. The fact that Kansas now outperforms other Great Plains states and the nation on any economic indicator is a significant departure from its traditionally unimpressive economic results.

Another favorite rallying cry against the so-called “devastating” Kansas tax cuts has been the false assertion that tax cuts lead to massive revenue shortfalls. This claim is perhaps the most often repeated and most misleading. The tax-and-spend narrative regarding revenue shortfalls ignores the clear impact of federal legislation on state revenues. A spike in income tax revenue at the end of 2012 created a misleading revenue baseline that had no hope of being repeated anytime soon. The above average revenue collections at the end of 2012 was because of the impending fiscal cliff negotiations that would increase the tax that higher income earners would have to pay if they realized that income in 2013. “The large increase in payments accompanying people’s income tax returns probably reflects the fact that higher-income taxpayers, anticipating changes in tax law, realized more income in 2012.” That quote is not from Governor Brownback but rather the non-partisan Congressional Budget Office.

In addition to the revenue complications attributable to the fiscal cliff, many pointed out (including Steve Anderson, the former Kansas State Budget Director) that the Kansas Legislative Research Division (KLRD) released misleading revenue projections that created the illusion of budget deficits. These budget and revenue questions have fueled concern over state spending on education. Fortunately, The Wall Street Journal recently pointed out that despite the discussion of revenue and budget shortfalls in Kansas, “Total per-pupil spending has increased to $12,960 from $12,283 over four years.”

The long term benefits of the Kansas tax cuts are still forthcoming, but the facts we already have discredit the deceptive misinformation campaigns.


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