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Costly Tax Plan Advances in Kansas

May 1, 2012 at 4:21 PM
BY
Erica Williams

Kansas lawmakers are moving forward with a costly plan to make deep cuts to income taxes -- with the biggest benefits going to wealthy individuals and profitable corporations -- and to help pay for it with higher taxes on the working poor. The plan also could very well lead to more cuts to an already underfunded school system.

The plan, which a House-Senate conference committee approved last week, would:

  • Make Kansas the first state in the nation to exempt all "pass-through" business income from an otherwise broad-based income tax. Pass-through income is untaxed at the corporate level and passed through to the owners of the business, who normally then pay personal income taxes on it. Under the proposal, all profits earned by pass-through businesses (and by individual or "sole" proprietors) would be tax-free.

    Proponents say the tax cut is a job-creation measure aimed primarily at small businesses. But, as our analysis shows, small, fast-growing businesses -- those most likely to create jobs -- likely would see very little benefit. A big share of the total profit that would become tax-exempt goes either to large pass-through businesses or to wealthy owners of large investment funds and other businesses that have few if any employees besides the owners.

    The plan would also slash the top two individual income tax rates.

  • Raise taxes on low-income families by requiring them to choose between the state's Earned Income Tax Credit and its rebate for taxes paid for food purchases. The plan would also bar renters from claiming the state's Homestead Refund, a property tax credit for people earning up to roughly $30,000, even though property owners generally pass on part of their property taxes in the form of higher rent.

The plan could cost hundreds of millions of dollars when fully implemented, creating pressure for more cuts in funding for schools and other public services. Kansas has made some of the deepest cuts in the nation to its K-12 education system since the recession hit; per-pupil funding fell by $689 (12 percent) between 2008 and 2012.

Forty-six Republican former lawmakers in the state have formed a group called Traditional Republicans for Common Sense to call for more thoughtful policy approaches. As one of them put it, "we have a moral obligation to the citizens of this state. If we want to ensure our long-term success, then we cannot mortgage our children's future. Every farmer will tell you that you reap what you sow."


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