Don’t let Kansas fiscal problems scare Kentucky out of tax reform

Jordan Harris
Jordan Harris

There’s a good reason you don’t hear conservatives lawmakers talk about Kansas when they talk about state tax reform.

It’s completely irrelevant.

By contrast, the defenders of our antiquated tax structure use it as an endless scare tactic. They either fail to understand the dynamics that created Kansas’ problems, or are hoping to intimidate lawmakers enough that they just keep Kentucky’s broken system.

Kansas is a great case study in the tornado that fractured politics and a failure to rein in spending can cause; but it teaches us nothing about sound tax policy.

When Sam Brownback became governor of Kansas in 2011, his state was in significant need of tax reform. It had a top marginal income-tax rate of 6.45 percent and a top corporate income-tax rate of 7 percent, both higher rates than neighboring Oklahoma’s and Colorado’s.

Brownback’s biggest hurdle in fixing it wasn’t economic, but political. The new governor, frustrated by left-of-center policy proposals, quickly developed a blood feud with Republicans in the state Senate. Sound reform measures which had made their way through the state’s House of Representatives were stalled in the upper chamber.

Brownback upset Senate Republicans even further when he became active in 2012 primary races, attempting to unseat the legislators stifling his agenda. Senate Republicans retaliated, stripping the House’s tax reform bill of measures that broadened the tax base and leaving only the cuts intact. In an act of frustration, Brownback called their bluff, signing the bill despite the absence of revenue increases and vowed to deal with the repercussions during his own reelection campaign.

It was a bold moment born in political turmoil, but was ultimately compounded by at least two policy mistakes. The bill made “S” corporations, also known as pass-through organizations, completely tax exempt. The hope was that this would help spur growth among small businesses, the organizations that normally use such a classification. It instead proved to illustrate an economic principle — capital will always find the path of least resistance.

Many businesses classified as LLCs, which make up the majority of organizations, wisely reclassified to avoid the income-tax burden.

The second mistake was again wrought by the legislature. Rather than reduce spending in response to tax cuts, the budget grew by $400 million, the exact opposite of what they should have been doing, compounding the problem.

There is plenty of blame to be assigned in Kansas, but none of it belongs to the economic principles that we’ve seen work time and time again, and none has relevant application to Kentucky. Kentucky lawmakers haven’t promoted different rates based on business classification, and Gov. Matt Bevin and his team will almost certainly present a budget that reduces spending in the next biennium.

In 2012, William McBride of the Tax Foundation analyzed 26 peer-reviewed studies published in academic journals dating back to 1983 to determine whether taxes had an impact on economic growth. His analysis found that 23 of the studies concluded that taxes did have an impact — a negative one. Every study he found published between 1997 and 2012 found that taxation, specifically corporate and individual income taxes, had a negative effect on economic growth.

Kansas’ failure has no bearing on this economic reality. Kentucky is in an economic growth crisis. In the last decade, the per-capita GDP only grew by 0.3 percent. Tennessee grew by 2.5 percent in that same period. Indiana grew even faster, increasing by 4.7 percent.

Several factors contribute to our sluggish economic growth, but fixing our tax code is a critical step towards reversing this course. We have a historic opportunity to transition our system and create a tax structure that promotes growth and provides quality employment opportunities to everyone in our state.

Our legislators shouldn’t allow this opportunity to go to waste, and shouldn’t be distracted by misapplications that aim to undercut sound economic policy. It’s time to build a tax code that promotes the commonwealth of all of our people and propels our state forward.

Jordan Harris is executive director of the Pegasus Institute, a millennial-led think-tank based in Louisville.