Kansas tax cuts ignite fierce debate in Missouri about competing

JEFFERSON CITY Nothing has dominated conversation in the Missouri Capitol this year more than Kansas.

Hoping to deter businesses and residents from moving across the state line, Missouri Republicans are determined to respond to massive tax cuts enacted last year in the Sunflower State.

“We need to do something bold. … We need to do something now,” said Sen. Eric Schmitt, a Glendale Republican. “There is a (cost) associated with doing nothing here. If we think that we are not going to lose part of our tax base to Kansas, we are fooling ourselves.”

Lawmakers tasked with crafting the state’s budget concede that sharply reducing taxes could make their job harder. However, they insist the long-term benefits to Missouri’s economy warrant potential short-term budget hardships.

Democrats, and even a few Republicans, question the wisdom of slashing taxes so soon after the deepest recession since the Great Depression. Kansas’ actions have led to huge budget shortfalls, critics point out, and probably will lead to massive cuts in places such as education and health care.

“I’m so irritated about hearing how great Kansas is when they are facing an $800 million deficit,” said Sen. Maria Chappelle-Nadal, a University City Democrat.

Missouri lawmakers who have been pushing for tax cuts for years are now trying to use the Missouri-Kansas border war as an excuse to advance their cause, said Kansas City Mayor Sly James.

“What we’re seeing,” he said, “is a political ideology that has found a convenient hook.”

Last year, Kansas Gov. Sam Brownback signed legislation slashing state income taxes and eliminating them entirely for nearly 200,000 businesses. The state’s nonpartisan Legislative Research Department estimates those cuts will create a $782 million budget shortfall in 2018.

This year, Brownback is proposing even deeper income tax cuts. To pay for them, he wants to keep part of a controversial sales tax increase and eliminate the home mortgage tax deduction.

The governor has been clear that his ultimate goal is to eliminate the state’s income tax completely.

“It’s not prudent for Missouri to just wait and hope for Kansas to implode, because if they don’t, Missouri is going to be in a world of hurt,” said Patrick Ishmael, policy analyst for the conservative Show-Me Institute. “Kansas is doubling down on a pro-growth agenda, and Missouri has to take notice.”

The businesses most likely to flee Missouri because of tax policy include high-tech and life-science companies, said Ray McCarty, president of Associated Industries of Missouri. And those, he said, are exactly the types of businesses the state has been trying to attract.

“What Kansas did really was a shot through the heart to Missouri,” he said.

Sen. Paul LeVota, an Independence Democrat, says he’s heard all these dire warnings before. The competition for businesses in the Kansas City area has always been contentious and expensive, he said.

According to an analysis released by The Associated Press last year, Missouri and Kansas have spent more than $750 million on tax incentives and bonds over the past five years attempting to lure businesses across the state line in the Kansas City area.

But tax incentives aren’t the main driver of economic growth, LeVota said.

“The reason Kansas has grown in the past is because they have a good quality of life,” he said. “They have good schools and good roads.”

Kansas’ tax cuts could put all that in jeopardy, LeVota said.

“It’s too soon to try to follow them when we don’t know the adverse impact those tax cuts are going to have,” he said. “We need to be the ‘Show-Me State,’ not the ‘Me-Too State.’”

The latest Missouri plan, sponsored by Republican Sen. Will Kraus of Lee’s Summit, would over the course of five years lower the top income tax rate to 5 percent from 6 percent, cut the corporate tax rate to 5.25 percent from 6.25 percent and create a 50 percent tax deduction for all businesses.

Kraus’ office estimates the cut would cost the state roughly $280 million in the first year and would eventually lower state revenue somewhere between $800 million and $1 billion. An official fiscal review of the plan has not been completed.

Kraus originally planned to enact most of the cuts immediately and offset the costs by increasing the sales tax from 4 percent to 6 percent, a move that would have generated more than $900 million in additional revenue.

That sales tax hike was removed from the bill by a unanimous vote in committee at the suggestion of LeVota.

“Raising the sales tax, which would hurt working families and small businesses, is not the way to pay for a tax cut for corporations,” LeVota said.

Ishmael, the policy analyst for the Show-Me Institute, said moving away from the income tax toward a sales tax would promote economic growth while avoiding short-term budget problems.

The income tax “impedes the growth of the private sector,” Ishmael contends. His organization was co-founded by retired investor Rex Sinquefield, who has spent tens of millions of dollars in recent years trying to eliminate Missouri’s income tax and replace it with a modified sales tax.

Critics of the idea have consistently argued that reliance on sales taxes shifts the burden of funding government onto the shoulders of low-income Missourians. But Ishmael said those same low-income Missourians are hurt by a lack of jobs caused by high income taxes.

Some of the revenue lost by cutting the income tax could also be recovered by reducing how much Missouri spends on tax credits, Ishmael said, such as those aimed at incentivizing low-income housing and historical redevelopment.

“We have to rethink how we tax businesses and how we tax Missourians,” he said.

Missouri is already a low-tax state, said Amy Blouin, executive director of the liberal Missouri Budget Project. The effective corporate tax rate is one of the lowest in the country, and the state ranks near the bottom nationally on revenue collected and government spending per capita.

“If state tax policy is a primary factor in motivating business investment, then Missouri should already rank as one of the best states in the nation for economic growth,” she said.

Missouri has cut hundreds of millions of dollars out of its budget in recent years, and as a result is falling behind in other factors that have a bigger impact on attracting businesses to the state, Blouin said.

The state currently doesn’t fully fund its K-12 school-aid formula, has cut higher education funding and lacks the money to rebuild crumbling infrastructure, she said.

In general, the grass is always greener in another state, said Lucy Dadayan, a senior policy analyst for the Nelson A. Rockefeller Institute of Government. Taxation should not be part of a “border war,” she said, but should be driven by a state’s needs.

Missouri has twice the population — and therefore more economic activity — than Kansas, she said. Additionally, Missouri’s top tax bracket kicks in at only $9,000 of income, which means the state basically has a flat tax.

“It might be a better decision to revisit and restructure the state’s personal income tax brackets, rather than simply reducing the tax rate,” she said, especially because Missouri’s economy has not fully recovered from the recession.

Backers of tax cuts point to a study of the Kansas plan by the Beacon Hill Institute at Suffolk University in Boston. It predicted that the tax changes should deliver 33,430 additional jobs in Kansas by mid-2018. Another model prepared by the Kansas Department of Revenue estimates 22,900 new jobs by June 2020.

By attracting new jobs, Kansas will broaden its tax base, said Kraus, the Missouri tax bill’s sponsor. He doubts the tax cut will ultimately result in the kind of budget shortfalls that have been predicted.

“Cutting taxes puts more money into people’s pockets,” he said. “That’s going to lead to more money in the economy and more jobs.”

As for the impact on Missouri’s budget, lawmakers will cross that bridge when they come to it, said House Budget Chairman Rick Stream.

“We’re Republicans, so obviously we prefer tax dollars stay in the hands of taxpayers,” said Stream, a Kirkwood Republican. “So if there’s a tax cut that reduces revenues, we’ll just have to do some budget cutting.”