Kansas Tax Experiment Will Affect Tax Reform: Democrats (Corrected)

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By Kaustuv Basu

Congressional Democrats pointed to Kansas’s decision to repeal its 2012 tax cuts package as proof that tax cuts don’t pay for themselves.

“No rational economist believes that tax cuts pay for themselves. That’s the land of the ultimate voodoo economics,” Sen. Mark Warner (D-Va.), a member of the Senate Finance Committee, told Bloomberg BNA June 7.

The June 6 news from Kansas comes at a time when Republicans are trying to hammer out a unified tax plan between the House, the Senate, and the Trump administration. President Trump has promised a “massive tax cut” while his administration has said that the cuts will be paid for through a combination of economic growth and broadening of the tax base. Some suggestions in the Trump tax plan, like a sharp reduction in the tax rates for passthrough businesses, are somewhat similar to the Kansas cuts.

Rep. Sander M. Levin (D-Mich.), the former ranking member of the Ways and Means Committee, said the news from Kansas would substantially impact the tax reform debate in Congress. “It blows a hole in these automatic theories of the Republicans,” Levin said.

Kansas was a real-life example and “you can’t wish these things away,” said Rep. Earl Blumenauer (D-Ore.), a Ways and Means member.

No Impact

The Kansas Legislature now has eliminated the income tax exemption for passthrough income while restoring an income tax bracket for those with higher incomes. The bill is estimated to raise around $600 million per year.

Republican lawmakers insisted that the news from Kansas wouldn’t affect the tax reform debate. “So to my knowledge, it has no impact,” House Ways and Means Committee Chairman Kevin Brady (R-Texas) told reporters.

Sen. Pat Roberts (R-Kan.), a member of the Senate Finance Committee, told Bloomberg BNA that the Kansas experience was not relevant to the tax reform debate in Congress.

There are economists who say that some tax cuts would certainly stimulate additional revenues, said Rep. Mark Meadows (R-N.C.), the chairman of the House Freedom Caucus, a group of about three dozen ultra-conservative lawmakers in the House. “Depends on how you do it. Depends on the plan that you have and obviously that is the debate that is ongoing right now,” he said. “I don’t see a state legislature decision having any implication on what we do at the federal level.”

Some Ways and Means Republicans say that they are aiming for a permanent rewrite of the tax code that will ultimately be revenue neutral, meaning that it won’t add to the deficit. But in the absence of legislative language and revenue estimates from the Joint Committee on Taxation, it is unclear how they would get to revenue neutrality.

Lessons Learned

Joe Henchman, the vice president of legal and state projects at the right-leaning Tax Foundation, said in an email that the 2012 tax cuts in Kansas were not offset with a broadening of the tax base that could ensure fiscal stability.

“The passthrough carve-out in particular promoted income shifting rather than economic growth, so it cost a substantial amount of revenue but didn’t provide much of an offsetting benefit,” he said.

Federal governments and other states need to make sure that tax cuts they select truly promote economic growth while broadening the base and cutting spending. “Most tax cuts won’t pay for themselves entirely, especially when those cuts create tax planning opportunities,” he said.

Rep. Tom Reed (R-N.Y.) told Bloomberg BNA that the Kansas tax experience demonstrated that “anything we do, you’ve to do within reason.”

“I think what they learned there is doing it overnight is not the cure-all,” but that a planned permanent policy that gradually reduced the tax burden would be a reasonable approach, Reed said.

With assistance from Christopher Brown in St. Louis.

To contact the reporter on this story: Kaustuv Basu in Washington at kbasu@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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