President Donald Trump and congressional leaders would be wise to research what happened in Kansas before proceeding with a federal tax bill that mimics tax policies that nearly bankrupted this state.
In an analysis published Wednesday, The New York Times reported that the proposed Republican tax plan would cut from 39.6 percent to 25 percent the tax rate on pass-through businesses such as sole proprietorships, partnerships and LLCs. Republicans also want to lower the top individual tax rate to 35 percent.
The strategy looks a lot like what Kansas did in 2012, when Republican Gov. Sam Brownback and a Legislature dominated by conservative Republicans bet big on trickle-down tax policies. They approved the so-called LLC exemption, eliminating income taxes on sole proprietorships and LLCs. They didn’t stop there; they lowered Kansas’ top income tax rate from 6.4 percent to 4.9 percent.
Brownback promised the tax cuts would stimulate the economy. Businesses were expected to plow their tax savings into expansions that would produce job and income growth. Kansas was going to be the economic envy of the country.
But Brownback’s grand experiment was a colossal failure. Instead of growth, Kansas’ economy sputtered, ranking among the 10 worst states in nearly every economic statistic during the Brownback era. Month after month, tax revenues fell well short of projections, leaving legislators with a singular option: to repeatedly slash funding for state services. But the cuts were never enough.
By the end of the 2016 fiscal year, The Pew Foundation released a study showing Kansas had the lowest cash reserves — about two days’ worth — of any state. Credit rating services took note. Moody’s downgraded Kansas in 2014, and put the state in a negative outlook in May 2016. S&P; Global Ratings also dropped the state’s credit rating in August 2014, again in July 2016 and put Kansas on a negative credit watch in February 2017.
Brownback has always contended that were it not for downturns in the state’s agriculture, aviation and energy sectors, the tax cut plan would have worked. He remained committed to the cuts even when it was clear he no longer had the Legislature’s support. During the 2017 session, the Republican-dominated Legislature repealed the LLC exemption and rolled back the 2012 cuts, overriding a Brownback veto to do so.
The Kansas tax cuts were devastating for the state, costing some $700 million per year in tax revenue. But the Kansas impacts were minor compared with what the federal plan could be.
The Times analysis estimated that by itself, the pass-through exemption in the federal plan could cost $41 billion.
No doubt, federal tax laws should be overhauled in favor of sensible and fair policies that benefit the most taxpayers, especially those in the middle class. But the federal plan, as currently proposed, doesn’t do that, and worse, it appears to borrow from the failed experiment in Kansas. At this point, Kansas tax policy should only serve as an example of what not to do.