Fri February 15, 2013
Kansas Struggles To Discover New Red State Model
Kansas Governor Sam Brownback has put the state on what he calls a “glide path to zero” income tax. But that glide path is far from clear, and it is definitely not smooth.
Kansas Governor Sam Brownback is a conservative Republican, flanked by GOP super-majorities in both legislative chambers. Last election, powerful allies helped purge moderate Republicans from the state senate. Brownback believes Kansas can show the country what can happen when pro-business policies replace more traditional state government.
“I think the road is open,” says Brownback. “I think we do provide an alternative model. I think we do provide a red state model.”
Last year Kansas eliminated income tax for more than 190,000 small businesses and cut the rate substantially for high-income individuals.
“We’re going from the highest tax state in the region to the lowest state tax in the region,” said the Governor.
“Bold moves” draw attention
Kansas has drawn the attention of some very influential conservatives. Jonathan Williams is in charge of fiscal policy at the American Legislative Exchange Council. The group has ties to the Koch Brothers and writes so-called “model legislation” adopted by conservatives around the country. Williams says that, while other seven other states have no income tax, Kansas is the only one to eliminate that levy just on small business, non-wage income.
“Governor Brownback has made very bold moves towards making Kansas a more competitive place to do business, and to create jobs,” says Williams.
No place is the excitement over Kansas tax cuts more evident than Kansas City, along the long the state line. Half a block from that border the accounting firm Meara Welch Brown PC has just moved from the Country Club Plaza, in Missouri, into new digs in Leawood, Kansas.
“We had been looking at some of the incentives on the Kansas side for quite a while,” says firm partner Stephen Browne. “And then when Governor Brownback offered the income tax credit, all of those together were just huge to us.”
Browne says that none of the firm’s 22 employees need to move. Many, in fact, have a little shorter commute. By trading one office building for another, though, and shedding most state taxes, they are boosting the firm’s income by upwards of six percent. The firm will be advising some of its clients, other professional service firms, to consider the same move.
The cost of tax cuts
The harder calculation is whether the firm’s gain, and Missouri’s loss, is actually a win for Kansas. Kansas State Representative Barbara Bollier, a Republican from Mission Hills, thinks not.
“That benefits no one in the end,” Bollier said of cross-border business moves. “And it hurts the people because the tax money is gone.”
Bollier says she’s pro-business, but that she just can’t swallow the size of last year’s tax cuts. They’ll cost the state more than 850 million dollars annually, with the bulk of it going not to businesses, but to higher income individuals.
“The governor’s been very clear it’s an experiment, and it is," says Bollier. “We were the only other state in the country that did this. So, it’s either a huge win or a horrible loss.”
Kansas relies heavily on income taxes. They account, even now, for about 36 percent of the state budget. What’s more, Bollier notes, several other states, including ones that border Kansas, are talking about cutting or eliminating those very same taxes. She fears the income tax in Kansas will provide too few new jobs, and too little new money for the state to avoid painful consequences.
“I have a hard time looking at the school children in my neighborhood, and saying 'I’m going to do an experiment on you, and if we lose, your schools are going down the tubes,'" says Bollier.
The Governor’s plan for this year
Governor Brownback promises that he’s not going to let that happen. He’s proposed paying for some of last year’s income tax cuts by extending a sales tax that’s set to expire, and ending state income tax deductions for mortgage interest and property tax.
The governor is proposing additional cuts this year too, slicing the lower income tax bracket. But the income tax it doesn’t take effect for years, so the upshot is tax hike of up to $455 million next year.
Democrats call it “Robin Hood in reverse," since sales tax tends to hit poor people disproportionately hard.
“Instead of taking from the rich and giving to the poor, the governor’s tax plan takes from the poor and gives to the rich,” says Anthony Hensley, Kansas Senate Minority Leader.
The Governor’s plan is not going over well with conservative Republicans, either. Representative Scott Schwab says backing the governor’s proposal would make liars out of them all.
“So you’re asking me to raise taxes today, for a tax cut in five years,” says Schwab. “A lot of people who campaigned this summer, that was not what they campaigned on. They campaigned on cutting taxes today.”
But tax cuts today, on top of big ones from last year, would likely crater the state budget, which could also be unpopular.
It’s messy. Not even Jonathan Williams at the America Legislative Exchange Council has no road map for where Kansas is heading.
“We don’t have any model legislation to say, here is how you kill an income tax,” says Williams.
“The transitions are the hardest piece of it,” says Governor Brownback. “If you ask people, 'do you want to do away with the state income tax?', a good potion would say yes. Okay, now how do you do that?”