Pro-business think tank not impressed with Kansas tax cuts

In this Jan. 12, 2016 file photo, Kansas Gov. Sam Brownback speaks to the Legislature in Topeka. (AP Photo/Orlin Wagner, File)

? A conservative, pro-business think tank in Washington, D.C., said this week that Kansas did little to improve its competitive business climate by enacting sweeping tax cuts in 2012 that lowered tax rates across the board and eliminated income taxes entirely for more than 330,000 business owners.

In its latest ranking of state business tax climates, the Tax Foundation, one of the nation’s oldest nonpartisan think tanks, said Kansas has only the 22nd most competitive tax code in the nation, and its individual income tax structure ranks only 18th.

“Broadly speaking, good tax structure involves broad bases and low rates,” said Jared Walczak, a policy analyst at the foundation and a coauthor of the report. “Kansas departed from the idea of a broad base in this pass-through exemption where you have some individuals who are able to escape income taxes entirely.”

The pass-through exemption refers to certain kinds of business structures in which the income of the business is, in fact, the personal income of the owners. That includes everything from the person who runs a cottage industry out of his or her home to large law firms and medical practices that are owned by the lawyers or doctors in those firms. It also applies to most farming operations.

In 2012, Republican Gov. Sam Brownback championed sweeping changes to the Kansas income tax code that included significant cuts in individual income tax rates, and a complete exemption for income derived from those “pass-through” business operations.

Since then, however, the state has experienced severe revenue shortfalls as it collected less money from income taxes, while revenue from other tax sources such as sales taxes have remained stagnant.

Since 2012, the year the tax cuts were enacted, total revenues from individual income taxes have fallen 23 percent, to less than $2.5 billion in the fiscal year that just ended June 30. That’s down from $2.9 billion the year before the tax cuts took effect.

Meanwhile, sales tax revenues have remained flat, growing only 6 percent over that same period, to about $2.3 billion last year. And that was largely because the Legislature passed a major hike in the sales tax rate last year in hopes of making up for revenue shortfalls.

Total general fund revenues from all sources have fallen 1.2 percent, or about $79 million, over that period, while total general fund spending has grown by 3.7 percent, or $224 million a year.

Walczak said one thing that has happened in Kansas as a result of the tax cuts is that some number of businesses have changed their corporate structure in order to take advantage of the pass-through exemption.

“The best tax policies try to avoid changing decision-making,” he said. “Taxes are necessary, but taxes should have the least impact possible on economic decisions, and that’s not what we see happening in Kansas.”

Topping the Tax Foundation’s list as having the most competitive tax code was Wyoming, which does not levy corporate or individual income taxes. Also in the top 10 states were Florida, which has no individual income tax, and Oregon, which has no state sales tax.

Brownback’s press secretary Eileen Hawley said that indicates Kansas should continue working to reduce income taxes.

“Many states ranked higher than Kansas have lower income taxes, or no income taxes at all, indicating Kansas should continue its work to maintain a low-income tax, stable policy that attracts businesses and families to Kansas, operate government efficiently and control the growth of government spending,” she said.

But Walczak said states like Wyoming, which relies heavily on severance taxes from the coal and oil industries, and Florida, with its large retirement-age population, are unique cases.

“There are, however, states that have much more typical economies and levy all of the major taxes that also do very well on the Business Climate Index,” he said.

He pointed to Indiana and Utah, both of which are also in the top 10, as well as North Carolina as examples of states that have recently adopted substantial, but “neutral” tax reforms.

“They’re not exempting certain classes of income or providing large incentives for particular business activities,” he said. “Instead, they’re creating a more level playing field where the state allows its tax code to reflect and adjust to a dynamic economy.”

Walczak said Kansas got credit for having low income tax rates overall, and for collapsing what had been three tax brackets into two, both of which were part of Brownback’s 2012 tax overhaul.

“But, in significant part because the state adopted this pass-through exemption, there’s actually been pressure to raise taxes elsewhere,” he said. “For instance the sales tax increase that we’ve seen recently, and pressure perhaps to raise taxes further to offset the very substantial revenue losses that were associated with tax cuts that were not offset by spending reductions, and the continued losses associated with that pass-through exemption. So ultimately that does not reflect sound policy and is not something that we would reward.”

The Tax Foundation was established in 1937. According to its website, its mission is to educate taxpayers, the media and policymakers about state and federal tax policies.

“At the state level, we use our research to foster competition between the states and advise policymakers on how to improve their tax systems,” the foundation’s website states.

According to its most recent annual report, it had a budget of about $3.7 million in 2015. Of that, 35 percent came from direct corporate contributions, 37 percent came from philanthropic foundations, and 14 percent came from individual donations.

According to the website Sourcewatch, in 2009 the Tax Foundation’s board of directors was chaired by Wayne Gable, who is managing director of federal affairs at Wichita-based Koch Industries.

Gable is no longer listed on the Tax Foundation’s board. But the current board does include former Texas Congressman Bill Archer, a Republican who chaired the House Ways and Means Committee from 1996 to 2001.