The impasse in Topeka over how to resolve the budget gap and whether to impose drastic tax hikes has captured the attention of both the state and the nation. Throughout the debate, the media and politicians alike have relied on anecdotes and hearsay, rather than statistical data. Sadly, hyperbole and hysteria have stymied reasonable dialogue between well-intentioned representatives.
Tax reforms which became effective in January 2013 made Kansas more competitive. The top marginal personal income tax is 15th lowest in the nation today versus 25th highest prior, according to the American Legislative Exchange Council report Rich States, Poor States. Pass-through entity income is exempt from the income tax thanks to these reforms, counterbalancing the fact top marginal corporate income tax rate remains the 24th highest in the nation.
Kansas exhibits marked economic improvement from the pre-reform era, jumping from 40th in the nation for private sector jobs growth between 1998 and 2012 to 30th from 2012 to 2015, according to the most recent data from the Bureau of Economic Analysis. Detractors from the 2012 tax cuts refuse to acknowledge an important piece of the jobs growth puzzle: pass through entities account for 98 percent of jobs gains since 2012 through 2015.
Despite claims that the pass-through income tax exemption has sparked a cascade of switches from C-corporations eager to avoid taxation, data show otherwise. An academic study released last year estimated that “recharacterization of pass through income accounts for roughly 8.6 million” of negative revenue impact in 2013.
According to the Kansas Department of Revenue, “In tax year 2013, 2 percent of C-corporations switched to pass-through entity. In 2014, 1.3 percent of C-corporations switched to a pass-through entity.” This is almost identical to the percentage switching rate of 1.2 percent in 2012, the year prior to the exemption.
The pass through exemption as a whole has “cost” the state less than $220 million in “lost” tax dollars each year. Yet statehouse liberals are using the “cost” of this pass through exemption as an excuse to hike taxes overall by upwards of $500 million annually — more than twice the size of the “problem.”
Do educational needs demand a tax increase? School districts are hardly strained for cash to meet budgetary demands. 2016 data from Kansas Department of Education shows the school system still retains cash reserves of nearly $911 million, not including dollars set aside for capital outlays and debt service — $443 million more than existed a decade ago. And total state and local spending per pupil increased by 11 percent from 2011 to 2016. In fact, inflation-adjusted per pupil spending has actually increased over the past several school years.
The Kansas Supreme Court has held that “the state’s public education financing system provided by the legislature for grades K-12, through its structure and implementation, is not reasonably calculated to have all Kansas public education students meet or exceed” the “adequacy requirement” of Article 6 of the Kansas Constitution. Although the court found that 75 percent of students are meeting the relevant academic standards under the current system, 25 percent of students are underperforming.
But nowhere in this 83 page ruling does the court mandate a specific funding level increase. Numerous states actually spend less per pupil on education while obtaining academic results superior to Kansas. Legislators can incentivize innovation, and expand school choice — particularly for those trapped in underperforming schools — rather than simply increasing funding levels.
Speaking of spending, the fiscal impasse cannot be completely understood without a look at spending trends. General fund spending has increased by more than 4 percent adjusted for inflation since 2012. General fund spending 1995 through 2017 rose approximately 55 percent, adjusted for inflation and a whopping 89 percent in current dollars. If General fund spending growth had been held to the rate of inflation throughout this period, fiscal year 2017 spending would be $1.12 billion less. Population increased just 12 percent from 1995 through 2016. In other words, for every 1 percent in population growth, spending increased by nearly 5 percent.
States such as Florida, Tennessee, and Texas now spend approximately 25 percent less per capita than Kansas. Not only does a giant tax increase constitute bad policy, it’s also bad politics. A new poll conducted by SurveyUSA shows that only 17 percent of Kansas voters say an business income tax increase should be the primary means to close the budget gap. Only 4 percent said a personal income tax increase should be the primary means. Yet these measures in defiance of voters are exactly what many legislators are proposing.
Alternatives to tax increases should be fully explored by the legislature. Only a gap of approximately $400 million over two years remains to be filled, according to the House Appropriations Committee. Securitizing a portion of the tobacco settlement revenue stream is one such potential remedy.
If legislators value the marked improvement in Kansas jobs growth since the start of 2013, minimizing the tax burden of jobs creators, entrepreneurs, and workers should be at the forefront of a final agreement.
Kansas Sen. Ty Masterson (R) represents the 16th State Senate District and is Kansas state chair of the American Legislative Exchange Council.
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