With Income Tax Eliminated, $85 Million Flows Into Kansas

Posted on: May 10th, 2016

Read on Forbes.com

For some, “the Kansas experiment” is a negative phrase – an epithet hurled toward anyone who would defend the sweeping tax reforms implemented four years ago in the Sunflower State. For others, however, “the Kansas experiment” is a bold and forward-thinking move. While dividends might not be immediately evident, free-market economists (as well as anyone who believes that when you tax something, you get less of it) are correctly eager to watch the experiment unfold and see where it takes Kansas in the coming years.

Of course, the political left is going to go full Chicken Little, claiming the sky is falling. Reality paints a far less gloomy picture. Since the implementation of tax reform (when the income tax levied on small businesses fell to zero), private-sector employment in Kansas is higher than in other states with a personal income tax. According to analysis from the Kansas Policy Institute, in the 14 years preceding Governor Sam Brownback’s tax reform, private sector jobs grew by just 2.3% total (or .02% per year), for that entire time span. That’s just 62.5% of the average growth for states with an income tax, and a paltry 15.4% of the average growth of states that do not levy an income tax. The picture gets brighter after the Brownback tax reform. Over the last three years alone, private sector employment increased by 4.0%.

Improvements occur gradually with tax reform, as with any kind of meaningful reform, with prospects looking brighter each year. Strains put on Kansas’ economy by other factors – factors that have nothing to do with taxes at all, have quite clearly limited Kansas’ growth post-tax reform. For example, Kansas relies heavily on the production of oil and gas. In January 2016, crude-oil production was down 21.8% over last year’s production figures. Weaknesses in agriculture, due to continually low crop prices and precipitously falling cattle prices, had major effects on the rural Kansas economy. These downturns create ripple effects throughout the entire state economy, regardless of tax rate. Interestingly, when these hard-hit sectors are taken out of the equation, the remainder of the private sector workforce in Kansas outperformed its neighboring states of Missouri, Nebraska and Oklahoma.

Unfortunately, those who choose to blame all of Kansas’ economic struggles on the Brownback tax reforms are being willfully disingenuous (at worst) or have an incomplete understanding (at best). Many on the left find it politically expedient to point to Kansas’ “tax problem.” In reality, though, what Kansas has is a spending problem. New revenue estimates released last month show that Kansas tax revenue increased 1.5% in 2015 and is expected to be 2.6% higher than that in 2016. So what’s the problem? Quite simply: revenue cannot keep pace with record-breaking spending that is a full $1.2 billion ahead of the 20-year inflation track. In 2014, Kansas spent 34% more per resident than states without an income tax did. Kansas’ budgets are so woefully bloated that even effective, practical tax reform cannot make the impact it should.

Even with these difficult factors, it’s certainly not all bad news. As Brownback hoped, by eliminating the income tax on small businesses, Kansas became much more attractive to business owners and entrepreneurs on the Missouri side of State Line Road. Data from the Internal Revenue Service and analysis by the Kansas Department of Revenue show strong post-reform money inflows. At present, Kanas holds a nearly $85 million cumulative advantage in income gains from the Show-Me State. This is a serious reversal of fortune: between 1995 and 2009, more than $263 million left Kansas for Missouri.

As with any historic change, the results of the Kansas tax experiment will unfold gradually and be affected by the many factors at play within the government and economy of the state. The best approach, for my home state of Missouri as well as other states considering meaningful reform, is to take a clear-eyed look at how the tax cuts impact small businesses – the true driver of the American economy – and to ignore distortions and fear-mongering. While no one has a crystal ball, I wouldn’t be surprised in the least to find, several years down the line, that this “tax experiment” has become a model that proves the point, once and for all, income taxes matter, and not in a good way.

Share on Facebook
'