Vice President for State Fiscal Policy
Update, September 29, 2017: We’ve deleted a paragraph from this post that was based on information released by the Brownback administration that later proved inaccurate.
Facing a $400 million shortfall in next year’s budget, Kansas’ Republican-led legislature is considering scaling back a centerpiece of Governor Sam Brownback’s massive 2012 tax cuts: an exemption for all “pass-through” income — or income that certain businesses may report on the owners’ personal income tax returns to avoid paying corporate income tax on it. A House committee passed a bill yesterday to eliminate the exemption and instead allow pass-through income to be taxed at a lower-than-normal rate.
Given Kansas’ lackluster economic growth and serious fiscal troubles, several lawmakers are publicly questioning the 2012 tax cuts. Rep. Mark Hutton, a House Taxation Committee Republican who introduced the bill to change the exemption, “said evidence didn’t exist to support a premise [that] the policy had been responsible for meaningful growth,” the Capital-Journal reports. Hutton stated, according to the newspaper, “I’ll go so far today to say it never will. . . . The benefit of this policy is insignificant in inducing businesses to come to this state to hire employees.’”
Fellow committee Republican Steven Johnson questioned the broader tax-cutting strategy, saying that “he had failed to find convincing evidence nationally of a strong correlation between tax policy and ‘strong growth’ in a state’s economy,” the Capital-Journal explained. “It is an important point, because the Brownback administration is devoted to a supply-side model that asserts lower taxes bring economic prosperity. Johnson described [the] outcome of his research, so far: ‘Inconclusive is the best I can come up with.’”
He’s right. There's no consensus among economists about the impact of state taxes on economic growth. Some studies find that higher taxes hurt growth, some find they help growth when they finance higher-quality education and better infrastructure, and most find that taxes have only a minor impact either way.
Even eliminating all tax breaks for “pass-through” income wouldn’t fully close Kansas’ shortfall, and the bill in question merely scales them back. Meanwhile, Brownback’s 2012 income tax rate cuts, which mainly benefit the wealthy, are greatly hampering the state’s ability to finance key investments like education.
While the legislation on the “pass-through” exemption is a step in the right direction, let’s hope that Kansas lawmakers face up to the harsh realities and change course more fundamentally.