The growing momentum behind federal tax cuts has defenders of high taxes worried. Witness their decision to start badmouthing Kansas tax cuts.
Tax-and-spend liberals and their media allies are trying to tie President Trump’s tax reform framework to the 2012 tax cuts in Kansas, which browbeaten Republicans largely reversed earlier this year.
“Kansas tried a tax plan similar to Trump’s. It failed,” reads a recent New York Times headline. “A warning to Washington from Kansas,” reads another from CNN. “Kansas abandons massive tax cuts that provided model for Trump’s plan,” says The Guardian.
A closer look at Kansas’ tax cut experience reveals this argument is more style than substance. That’s not to say Republican tax reform advocates in Congress and the White House can’t learn from Kansas – just not the lesson that pro-tax activists are trying to impart.
Some background: In 2012, Kansas Gov. Sam Brownback signed a bill cutting taxes for all state income earners and eliminating them for small businesses that had previously been subject to individual rates. Brownback wanted to give some relief to hardworking taxpayers and boost tepid economic growth.
The fallout, according to media accounts, was near apocalyptic: a “spectacular failure” (Los Angeles Times) that caused “hemorrhaging government revenue” (New York Times).
But looking at objective government figures, the results are far more positive. According to Census Bureau data, Kansas’ total tax revenues actually rose in 2012, the year the tax cut took effect, to $7.4 billion – a 9 percent increase from $6.8 billion in 2011. Revenues grew further to $7.6 billion in 2013.
How can reality be so different from rhetoric? Well, it’s true that Kansas’ total tax revenue dipped to $7.3 billion in 2014, largely due to the commodity price crash and fiscal cliff federal tax hikes that reduced revenues in several states.
But Kansas tax revenues quickly bounced back to $7.9 billion in 2015 and $8.1 billion in 2016. This tax revenue growth between 2011 and 2016 exceeded average revenue growth in neighboring Missouri, Nebraska and Oklahoma’s over the same period.
Meanwhile, the tax cuts allowed all employees in Kansas to keep a little more of their earnings, which helped Kansas’ real median household income to increase by 15 percent between 2011 and 2016. This income growth was four times faster than the Missouri, Nebraska and Oklahoma average, and noticeably outpaced the national rate of 11 percent.
Kansas’ dramatic median income growth over this period bolsters economic and survey evidence that suggest businesses use part of their tax cut savings to worker raises.
This isn’t to say that Kansas’ income tax cut could not have been designed better. Rather than eliminating the small-business tax rate entirely, policymakers should have simply cut it deeply, so it could still capture revenue from ensuing economic growth. Similarly, eliminating deductions, credits, and loopholes – part of Brownback’s original plan – would have broadened the tax base to make the tax code fairer and more efficient.
The proposal Republicans in Congress are working on would do both these things, cutting the small business rate to 25 percent from about 40 percent, and eliminating deductions like the one for state and local taxes that force people in low-tax states to effectively subsidize high-tax states.
Republicans in Congress and the Trump administration can also learn from Kansas by ensuring their plan has guardrails in place to prevent taxpayers from simply shifting their earnings from wage to business income to lessen their tax burden. This is what tens of thousands of Kansas accountants, lawyers, dentists and other professionals did.
The New York Times reports that David Beaty, head coach of the University of Kansas football team, shifted more than two-thirds of his $800,000 annual salary to his business entity to avoid paying about $37,000 in state income taxes. Republicans must learn from this and implement simple rules in their tax plan to prevent such gaming of the system.
But Republicans and tax cut advocates shouldn’t allow “Kansas” to be heard as a disparaging word. Kansas demonstrates that even an imperfect tax cut can still raise incomes and revenues. Imagine what a great one could do.
Alfredo Ortiz is President and CEO of the Job Creators Network, a non-partisan organization founded by entrepreneurs.