Tax Cut Defenders: Spending Hikes Were Kansas Experiment Flaw

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By Christopher Brown

When you hear the words “Kansas tax-cut experiment,” think instead of North Carolina and Florida.

This was the advice given by Grover Norquist and other speakers at a Heritage Foundation panel event April 10.

The Kansas experiment—which has been derided as a fiscal disaster by progressives and moderates alike, and which was repudiated by the Kansas Legislature at the end of a tumultuous 2017 legislative session—was poorly conceived and has been incompetently defended, Norquist and the other speakers said.

Kansas lawmakers’ efforts to climb out of the revenue hole left by the tax-cut experiment appear to be continuing. The Legislature passed a school funding bill ( S.B. 423) April 7 that will add $525 million in annual state funds for K-12 education, a move made under pressure from the state Supreme Court, which ruled in October 2017 that additional funds will be needed.

But despite the Legislature’s retreat, the Kansas experiment doesn’t refute the idea that tax cuts can be beneficial for economic growth and useful in keeping government spending in check, said Norquist, who is the founder and president of Americans for Tax Reform. For proof, he encouraged his listeners to look to other states that have recently engaged in tax cutting experiments, including North Carolina and Florida.

And defenders of tax cutting efforts can point to several states that have gone in the other direction and are enduring their own fiscal nightmares, including Illinois, Connecticut, and California, he said.

“The left’s focus on Kansas has been unhelpful to Kansas and to the cause of tax reform, but it also shows how weak their hand is,” Norquist said. “It’s one thing for them to go ‘ha ha ha Kansas.’ But that’s not much of an argument in other states that are failing, such as Illinois. And you can’t scare people in Florida into having an income tax by saying ‘Kansas.’”

Kansas Experiment

The focus of the panel discussion was a 2012 tax-cut package passed under the prompting of former Gov. Sam Brownback (R). The package slashed corporate and individual income tax rates and eliminated all taxation of income for pass-through entities.

The result was a $700 million drop in revenue the first year along and a run of five straight years of fiscal turmoil. The Legislature found itself forced to raise sales taxes three years later in an effort to recoup at least a portion of the lost revenue, before essentially repealing the package in 2017.

The problem with the Kansas experiment was the Legislature’s unwillingness to control spending as it was slashing revenue, according to Dave Trabert, president of the Kansas Policy Institute, who joined Norquist on the panel.

The Legislature approved a $400 million spending increase in the first year of the tax cuts and increased overall spending several more times before the package was repealed, Trabert said.

Lawmakers also had no plan in place showing how they were going to balance the budget, and didn’t have systems in place to identify areas of spending that could be cut, he said.

Pass-Through Exemption

One area of the 2012 tax cuts that came under fire from all ideological sides, including from tax-cut-friendly groups such as the Tax Foundation, was the pass-through income exemption.

Critics argued that the exemption was an unfair perk for business owners and that it encouraged taxpayers to play tax-avoidance games through their choice of business entity.

Trabert said research shows that critics have significantly overstated the number of businesses that switched to pass-through status after the tax cuts were passed. Figures from the state Department of Revenue showed just a “tiny uptick” in pass-through entity formation after 2012, he said.

He added that census data on job creation shows that pass-through entities have been responsible for essentially all of the private sector job growth in the U.S. economy since 1977, which demonstrates the importance of removing barriers for entrepreneurs.

“It’s critically important that we understand that taxes are a huge deterrent to the formation of small businesses,” Trabert said.

Role of the Courts

Norquist also argued that supporters of tax cuts and limited government must take seriously the role that courts can play in thwarting their goals.

The Kansas Supreme Court, which has inserted itself into the state’s school-funding debate, is a case in point, he said. The court ruled last year that the Legislature was falling short of its constitutional duties to provide enough money for K-12 education and to divide the money fairly.

The ensuing debate is over what it means to provide an adequate education and whether the court itself should have a role in what some see as a core legislative function.

Members of Senate leadership attempted to make their cooperation with efforts to raise school funding contingent on passage of a proposed constitutional amendment that would reassert the primacy of the Legislature in making school-funding decisions. But that threat was ultimately dropped.

Norquist said that Kansas was only one of several states where courts have overridden their legislatures on school-funding issues.

“Legislatures and governors need to focus on what kind of courts you have in the states,” he said. “Some of our best Legislatures and best governors have been thwarted by Supreme Court decisions. And this is a piece of our inability to rein in spending.”

To contact the reporter on this story: Christopher Brown in St. Louis at ChrisBrown@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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