Kansas should serve as a cautionary tale to the nation, according to a Democratic senator from its neighbor to the east.
U.S. Sen. Claire McCaskill, a Missouri Democrat, warned Tuesday at a town hall that President Donald Trump and congressional Republicans are pursuing a tax plan that will disproportionately benefit the rich. She called Trump’s efforts to reduce income tax on pass-through businesses “particularly egregious.”
“Does anyone know what ‘pass-through’ actually is?” McCaskill asked the gathering of Missourians in Independence, receiving silence and confused looks. “See, I think they’re counting on that.”
McCaskill explained that the vast majority of businesses in the United States are formed as pass-through entities, such as limited liability companies and S-corporations, meaning the profits pass to the business owner directly.
“The pass-throughs are every lawyer you know. Every doctor you know. … Every real estate deal is a different LLC. Now under the law, the LLCs pay whatever that individual’s tax rate is. So if there’s somebody who’s very wealthy, like a lawyer or a doctor, the pass-through income is taxed at whatever his income tax would be,” McCaskill explained to the crowd.
Business owners in the top bracket pay a rate of 39.6 percent, but the Republican tax plan would reduce it to 25 percent, a move that McCaskill said would disproportionately help wealthy business owners.
“It particularly is good for real estate people who have hundreds and hundreds and hundreds of LLCs. It’s a big tax cut,” McCaskill said. “It’s a huge tax cut for the wealthy.”
That would include McCaskill’s own family. Her husband has ownership interests in dozens of LLCs and limited partnerships that would benefit under the tax plan, according to her financial disclosure form.
“No question my family would benefit from this tax plan, but my family doesn’t need a tax cut,” she said. “In fact, my family should be paying more in taxes.”
Trump urged Missourians to vote McCaskill out of office in August if she didn’t cooperate with his push for tax cuts when he delivered a speech in Springfield.
The concept of a pass-through business tax cut may be unfamiliar to some Missourians, but just 12 miles west of where McCaskill spoke, many voters in Kansas are well-acquainted with idea.
The state in 2012 eliminated income taxes for pass-through business owners at Gov. Sam Brownback’s urging. This year, Kansas lawmakers overrode a Brownback veto to repeal the policy, which had become politically toxic in the face of a massive budget shortfall.
But while the policy was in place, more than 300,000 business owners — including lawyers, farmers and the owners of some of the largest companies in the state — paid no state tax on their income unless they also drew a salary from the company.
Kansas suffered budget shortfalls for multiple years, and its job growth lagged both the nation and neighboring states, including Missouri, during the period the cuts were in effect.
“The experiment in Kansas has been termed a disaster just about everywhere, including Kansas,” said McCaskill, noting that a GOP-controlled Legislature defied Brownback to repeal the policy. “I think Kansas should be a cautionary tale for the folks in Washington who are pushing this plan.”
Several Kansas Republican lawmakers agree with the Missouri Democrat.
“Yes, Kansas should be used as a cautionary tale,” said state Rep. Melissa Rooker, a moderate Republican who noted that the state went through multiple rounds of budget cuts before finally ditching the tax plan.
“Anyone who wants to dismiss Kansas as some sort of an anomaly is kidding themselves. And it worries me not just to see similar ideas proposed … but a rather broken process at the federal level.”
Kansas’ 2012 tax plan was passed without being fully vetted, she said, and federal lawmakers should avoid making the same mistake.
But Brownback, who is set to join the Trump administration as an ambassador in the coming weeks, and his closest advisers remain convinced of the policy’s merits.
Nick Jordan, who oversaw the tax cuts’ implementation as the state’s former revenue secretary, pushed back on McCaskill’s contention that pass-through cuts disproportionately benefit the rich.
“There’s a couple facts that I think get lost in this rhetoric. Ninety-three percent of the businesses that took advantage of that tax policy had a net income of $75,000 or less a year. So that’s hardly rich,” said Jordan, now the state’s interim commerce secretary.
“It did not disproportionately benefit the rich,” he said. “It certainly helped some true small businesses.”
However, a significant amount of the overall benefit went to the top tier of business owners. The less than 1 percent of business owners who made more than $500,000 a year accounted for 40 percent of the total benefit, according to data the Revenue Department collected for the Legislature back when Jordan ran the agency.
Jordan said 20,000 businesses formed under the Brownback tax plan and provided $1 billion in new investment in the state.
“I heard dentists who added staff. I heard lawyers who invested in small businesses. So I wouldn’t paint with a broad brush that they just put the money in their pockets and ran,” Jordan said. “That money was put back into the Kansas economy through reinvestment.”
Rooker said hindsight shows that tax plan proponents oversold the amount of growth the cuts would generate. She noted that many of the architects of Kansas’ plan, including former Reagan economist Art Laffer, have been working to promote federal tax cuts.
Jeff Glendening, the Kansas director of Americans for Prosperity, a group that has pushed for state and federal tax cuts, warned against comparing the Kansas tax experiment and the proposed federal cuts as “an apples and oranges argument.”
But Glendening, whose group has been targeting state lawmakers who voted for the override, still maintained that the Kansas plan could have succeeded if given more time.
“We didn’t give that tax (cut) time to do what it really could have done,” he said.
State Rep. Stephanie Clayton, an Overland Park Republican, said that she would “absolutely agree with the Missouri senator down to the phraseology” that Kansas should serve as a cautionary tale.
“Hearing some of the rhetoric at the national level that’s being used to push this seems eerily familiar. It’s like, ‘Hey, I remember this,’ ” she said.
Clayton said that Kansas was five years ahead of the nation in terms of understanding the folly of pass-through tax cuts, a policy that even many conservative state lawmakers spoke against in the past year.
U.S. Rep. Lynn Jenkins, a Topeka Republican who sits on the committee crafting the tax plan, has tried to distinguish between the proposed federal cut and the total carve-out that Kansas enacted.
“While some may try to compare this tax reform framework to what was tried in Kansas, the truth is these two reforms could not be more different,” Jenkins said in a statement last month. “Under our framework, everyone pays a lower rate. In terms of pass-through businesses, Congress will lower the rate to 25 percent, not 0 percent. Our approach will actually lessen the tax avoidance and simultaneously bring American companies firmly in line with our global competitors.”
U.S. Rep. Kevin Yoder, an Overland Park Republican, also argued in an email Tuesday evening that the congressional plan is significantly different from the Kansas experiment.
“While policies in Kansas were accused of encouraging tax avoidance, we do the opposite,” he said. “Our plan makes sure that all businesses pay their fair share by closing existing loopholes and helps working families keep more of what they earn by lowering overall rates.”
Clayton expressed amazement that the state’s entirely Republican congressional delegation appears largely supportive of the Trump tax proposal.
“They seem to be saying this is different and everything is fine. I guess, bless their hearts, they’ve just spent too much time back east,” she said. “… Their own electorate has been against these tax cuts.”