In Kansas, A ‘Glide Path’ To No Income Taxes. Will It Work?
Thursday, February 14, 2013
Kansas Gov. Sam Brownback has put the state on what he calls a "glide path to zero" income tax. But that glide path is far from being clear or smooth.
On the face of it, Brownback seems to enjoy a remarkably strong political position. He's a conservative Republican, flanked by GOP supermajorities in both legislative chambers. His allies helped purge moderate Republicans from the state Senate in last year's election.
"I think the road is open," Brownback says. "I think we do provide an alternative model. I think we do provide a red-state model."
In 2012, Kansas eliminated the state income tax for about 190,000 small businesses and cut the rate substantially for high-income individuals.
"We're going from the highest-tax state in the region, to the lowest-tax state in the region," Brownback says.
Jonathan Williams, director of the Tax and Fiscal Policy Task Force for the American Legislative Exchange Council, says no other state has eliminated the income tax for small businesses. The group has ties to politically active corporations, like Wichita-based Koch Industries.
"Well, Gov. Brownback has made very bold moves towards making Kansas a more competitive place to do business and to create jobs," Williams says.
And that move is causing a stir in Kansas City, along the state line that divides the community between Kansas and Missouri.
Seizing A No-Tax Opportunity
Steve Browne is a partner at Meara Welch Browne, an accounting firm that's relocating to Kansas from Missouri.
"Well, we moved from just a mile or two miles on the east side of state line to literally ... a few hundred yards on the west side of state line now," he says.
Browne says that none of the firm's employees needs to move. By trading one office building for another, though, and shredding most state taxes, the firm is boosting its income by more than 6 percent. It was a no-brainer for the business move.
But the important calculation here is whether the firm's gain, and Missouri's loss, is actually a win for Kansas.
'It Hurts The People'
"That benefits no one in the end. And it hurts the people because the tax money is gone," says Republican state Rep. Barbara Bollier.
Bollier lives in Mission Hills, Kan., just north of where the accounting business is moving. She's pro-business but can't swallow the size of last year's tax cuts, which will cost the state more than $850 million annually -- with the bulk of it going to higher-income earners.
"The governor's been very clear it's an experiment, and it is," she says. "We were the [only state] in the country that did this. So it's either a huge win or a horrible loss."
Bollier points out that income tax produces more than a third of state revenues. She says several neighboring states are talking about cutting or eliminating the same taxes.
She fears a race to the bottom, which could possibly limit new jobs and bring too little new money for Kansas to avoid painful consequences.
"I have a hard time looking at the schoolchildren in my neighborhood and saying, 'I'm going to do an experiment on you, and if we lose, your schools are going down the tubes,' " Bollier says.
Brownback promises that he's not going to let that happen, but there's a problem: lost revenue from the income tax cuts. So he's proposed something radical for a conservative Republican: a serious tax increase, one he hopes will be short term.
An Arduous Process
The governor wants to extend a sales tax that's set to expire and end some tax deductions. When you add it all up, projected tax revenues actually go up by as much as $455 million.
Democrats are calling it "Robin Hood in reverse," stealing from the poor to give to the rich. And it's not going quite smoothly with Kansas Republicans like Rep. Scott Schwab.
"So you're asking me to raise taxes today for a tax cut in five years," Schwab says. People who campaigned in the summer promoted "cutting taxes today," he adds.
But tax cuts today -- on top of big ones from last year -- would likely crater the state budget, which would also be unpopular.
It's messy. Brownback says the transition is the arduous part of the process.
"If you ask people, 'Do you want to do away with the state income tax?' a good portion would say yes," he says. "OK, now how do you do that?"
How indeed? It's a question vexing Kansas, as it struggles to develop a new "red-state model."
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