Research & Commentary: Lessons of Kansas’s Income Tax Reforms

Published September 5, 2014

Kansas has taken several steps in recent years to bring down its tax burden and make the state more competitive for new jobs and businesses. In 2012, Gov. Sam Brownback signed legislation enacting the largest tax cut in Kansas history; the reform plan reduced the state income tax rate to 4.9 percent from 6.45 percent and eliminated income taxes for about 190,000 Kansas small businesses. Of all the states lowering income tax rates, Kansas has become a flashpoint for the battle between liberals and conservatives over the effectiveness of income tax cuts. 

The short-term revenue results of these income tax cuts have been mixed, and opponents of tax cuts have used these shortfalls to discredit them. According to a report by the state’s Department of Revenue, Kansas brought in $726 million less in tax revenue this fiscal year than last year. That trend reversed in July, with the department reporting revenue in the first month of the fiscal year was $1.6 million above the target set by the Brownback administration. 

Critics may try to blame the decline in revenue on the tax cuts, but state income tax collections have decreased in most states in recent years, including many that did not lower income taxes. A recent study by the Rockefeller Institute of Government found state personal income tax collections declined by 7.1 percent in January–April 2014 compared to the same period a year earlier, for 38 early-reporting states. 

Proponents of income tax cuts argued these revenue shortfalls were to be expected, a reaction by taxpayers to the potential for large tax increases once the Bush tax cuts expired. At the end of 2012, in anticipation of the expiration, many investors, businesses, and high-income earners reported their income or sold stock to get in under the lower tax rates. That shift created a tax windfall in many states, with personal income tax revenue rising 18 percent and corporate income taxes increasing by about 10 percent. The one-time windfall in 2013 was counterbalanced in 2014, with states collecting $7.9 billion less than in the same month in 2013. 

Although many states attempted to take this distortion into account when they made their 2014 revenue forecasts, several states were unable to predict how sharp the decrease would be, the Rockefeller Institute notes. And much of the bluster about a revenue shortfall may be overblown: Because Kansas is required by law to have a balanced budget, a significant budget surplus this year is likely to alleviate much of the concern over the lower-than-expected revenue collections, according to Americans for Tax Reform. 

Regardless of the effects of the tax cuts, the Kansas Policy Institute argues the legislature has not done enough to cut spending, which has grown by almost a billion dollars since 2011, according to The Kansas City Star. The primary goals of a state’s tax policy should be to bring in enough revenue to cover the costs of necessary functions of government in the least distortionary way. Personal and corporate income taxes are generally considered to be the most destructive taxes because they discourage production, innovation, and risk-taking. 

Historically, income tax cuts have led to greater economic development and increased tax revenue. Although the early results of the Kansas tax cuts were lower than expected, they were not in any way catastrophic and have begun to reverse. More time is necessary before passing judgment on their success or failure. 

The following articles examine income tax reform from multiple perspectives.

April “Surprises” More Surprising than Expected: Depressed Income Tax Collections Adding to Budget Pressures
States that collect personal income taxes enjoyed strong growth in income tax collections last year but face widespread shortfalls this year, according to this report from the Rockefeller Institute of Government. The report examined January to April tax collections for 38 of the 41 states that impose broad-based personal income taxes. It showed an overall decline of 7.1 percent, or $8.4 billion, when compared with the same period a year earlier. 

How Budget Deficits Are Fabricated in Kansas
Local and national media are reporting Kansas will have a $1.2 billion deficit for FY 2019, quoting legislators who cite the Kansas Legislative Research Department (KLRD). There is a report from KLRD showing the numbers the legislators are citing, but Kansas will not have a budget deficit in FY 2019 or any other year. The Kansas Policy Institute discusses how budget deficits are fabricated in Kansas: “Budget deficits are constitutionally and statutorily prohibited. KLRD confirms Kansas cannot have budget deficits and we believe it is a misrepresentation of their work to say there will be deficits.” 

Nothing the Matter with Kansas’ Tax Policy
Stephen Moore of The Heritage Foundation responds to Paul Krugman’s criticism of Kansas’s tax reforms: “As for Kansas, the tax cut has been in effect a mere 18 months—not a lot of time to measure the impact. We will see over the next few years whether growth is revived in a state that people have been fleeing for the past decade. Tax revenues are down, but they are in most states because of reductions in capital gains receipts from 2013.” 

Are Tax Cuts Working in Kansas?
Ira Stoll of the Reason Foundation examines the responses of supporters of Kansas’s income tax reform to the storm of criticism coming from progressive groups. 

Kansas Tax Cuts Are Working
Will Upton of Americans for Tax Reform examines the effect of Kansas’s income tax cuts and argues to really understand the success of the Kansas tax cuts, one must look not at a U.S. aggregate of unemployment data but instead at the Kansas-Missouri border, where two states share a split metro area and for all intents and purposes a porous boundary. The Kansas side of the border is far outperforming the Missouri side. 

Krugman: Wrong on Taxes, Wrong on Kansas
Will Freeland of the American Legislative Exchange Council responds to Paul Krugman’s critique of income tax cuts and argues a comparison of the nine states with no income taxes versus the nine states with the highest income taxes clearly shows the no-income-tax states are outperforming their high-tax counterparts and the national average. 

Surpluses and Tax Cuts for Some States, Deficits for Others
Pamela M. Prah of Stateline discusses how states have emerged from the recent recession and how their budgets and employment have worsened or improved: “For the first time since the recession ended, state revenues and employment have both surpassed pre-recession levels, at least in the country as a whole. But if this is finally the ‘good times,’ it sure doesn’t feel like it to some states.” 

States See Spring “Surge” in Income Tax Revenues
Joseph Henchman of the Tax Foundation examines the 2013 tax windfall that resulted from the 2012 fiscal cliff, and he warns states against assuming the additional revenue was anything but a temporary increase: “All good news, right? So long as we understand that if [acceleration] is indeed the cause, much of the boost is temporary. One-time sales of capital gains are exactly that: one-time. The CBO report I just linked to unnerved me a bit because they show this spring’s tax revenues as an upward trend rather than a spike. States should be careful not to make that same assumption.” 

CBO Disproves Paul Davis’s Talking Points on Kansas Revenue Numbers percentE2 percent80 percent99s-talking-points-kansas-revenue-numbers#ixzz35awAsFkE
Will Upton of Americans for Tax Reform responds to critics of the Kansas tax reforms who cite the decreases in revenue as proof the income tax cuts failed: “A quick glance at the CBO’s Monthly Budget Review would have provided some clarity for Davis and Hutchinson News. For instance, the January 2013 report notes: ‘Nonwithheld tax receipts for the first four months of the fiscal year rose by $15 billion (or 18 percent), mostly owing to the January boost brought about by taxpayers’ shifting of income from calendar year 2013 into late 2012 in anticipation of higher tax rates.'” 

The Historical Lessons of Lower Tax Rates
Daniel Mitchell of The Heritage Foundation examines the historical results of income tax cuts and finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase. 


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