Analysts from left and right call Kansas tax plan the worst in U.S.

05/05/2014 11:06 PM

05/20/2014 10:42 AM

Kansas’ tax reform plan was named the worst in the nation by analysts from both the left and the right in a feature story by a national magazine.

Governing magazine asked two tax policy experts from nonprofit think tanks on opposite sides of the political spectrum to name the best and worst tax reform efforts in the country — and both cited Kansas as the worst.

It was a rare point of agreement between Joe Henchman of the conservative-leaning Tax Foundation and Nick Johnson of the left-leaning Center on Budget and Policy Priorities.

Henchman, a lawyer, and Johnson, an economist, both said the tax plan, passed last year by the Kansas Legislature at Gov. Sam Brownback’s urging, encourages tax avoidance and probably won’t do much for the economy.

Sherriene Jones-Sontag, a spokeswoman for Brownback, disagreed, saying that “the facts speak overwhelmingly to the success” of the tax plan.

“The governor’s tax policy is the reason why GTM chose to add 600 jobs to its location in Manhattan, rather than in Texas,” Jones-Sontag wrote in an email response to The Wichita Eagle. “Almost every one of our neighbors is trying to move in this direction.”

GTM Sportswear makes uniforms for school athletic teams, bands and cheerleaders.

The analysts were especially critical of the unique centerpiece of Brownback’s tax plan that eliminates the state income tax on owners of sole proprietorships, limited-liability companies and corporations organized under subchapter S of the federal tax code.

Those businesses are called “pass-through” entities because the business income is not taxed and passes through to the owners, who then pay the taxes on it as individual income.

Since Brownback’s plan was enacted, the owners of pass-through entities don’t pay any state income tax on their business income, either at the business or personal levels.

“That’s an incentive to game the tax system without doing anything productive for the economy,” Henchman said in the Governing interview. “They think things like the pass-through exemption will encourage small business, and to be fair, it might. But they are doing it in a way that violates the tax principle of neutrality.”

Neutrality is a widely accepted principle that tax systems should be structured so that business decisions are made on economic merits rather than for tax reasons. Henchman laid most of the blame on the Legislature for not broadening the tax base while cutting rates, which Brownback originally proposed.

Jones-Sontag said the tax plan is working the way it is supposed to.

“Even though it’s just a little more than three months since the new policies took effect, we are hearing from small-business owners about how they now have the money to invest back into their businesses and to hire more workers,” she said. “It’s important to remember that 98 percent of businesses in Kansas have 100 employees or less.

“Why wouldn’t we want to create a pro-growth environment that lessens their tax burden so they can invest more in their companies, hire more employees and spend more in their communities?”

However, Johnson told Governing that the tax plan “fails almost every test of good tax policy,” including sustainability and fairness.

“Vertically, it’s beneficial to high-income taxpayers and harmful to low,” Johnson was quoted as saying on the magazine’s website. “It doesn’t do much for the middle either. Horizontally, its exemption of pass-through entities creates inequities and tax avoidance, which of course then goes back to sustainability because it balloons cost.”

Neither of the analysts thought the plan would do much to jump-start economic growth and job creation.

“Evidence suggests that there’s no goose to the economy from this or, if there is one, it will be small,” Johnson was quoted as saying. “The real big problem here is that because it costs so much money, it will make it harder for Kansas to make other kinds of investments that are important to a strong economy like education and infrastructure.”

The analysts split on the states with the best tax reform plans.

Henchman cited Rhode Island, which cut tax rates, eliminated itemized deductions and reduced tax credits, while increasing the standard deduction for most taxpayers. Johnson said he favored Massachusetts, where the governor has proposed increasing income tax rates and lowering sales taxes, which Johnson said would make the state tax code more progressive.

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