In the last decade, many states have found opportunities to advance comprehensive taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform, the kind of changes that broaden tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s, lower tax rates, and improve economic outcomes. While any tax reform proposal should be judged on the merits of its policy ingredients, recent efforts to join this positive comprehensive state tax reform trend are encountering a rhetorical tactic that I like to call the “Every Tax Cut is Kansas” card.
A riff on the logical fallacy of the “straw man,” the strategy is to invoke the Kansas 2012 tax debacle – one of the most problematic state tax reform attempts in recent memory – and insist that other states that engage in any sort of tax reform that lowers tax burdens will have similar calamitous budget consequences as seen in Kansas.
Perhaps you have heard argumentum ad Kansas employed before. Take for example this 2014 blog post by our friends and occasional sparring partners at the Center on Budget and Policy Priorities (CBPP):
Kansas in 2012 enacted perhaps the nation’s largest state tax cut ever. As we wrote earlier this year, […] state revenues have plummeted, employment growth has continued to lag the national average, and the state’s credit rating has been downgraded.
The Kansas tax cuts were followed, in 2013, by big tax cuts in Indiana, Ohio, North Carolina, and Wisconsin. While none were as big as Kansas’, they generally included many of the same ingredients […] it’s no surprise that elected officials in other states want to pretend their strategies are very different.
To read this at face value, you’d think Kansas was the first state to ever cut taxes, and these other states jumped on the bandwagon. In reality, Indiana started a multiyear tax reform in 2011 (a year before Kansas), and North Carolina’s tax reform proposals had been bubbling for years before passage of its 2013 package. The state let temporary income surtaxes and sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. hikes expire in 2011, which many state legislators mark as the start of their state’s tax transformation efforts.
Suspiciously missing from this post is mention of the then-recent New York state corporate tax reform championed by Governor Andrew Cuomo (D) that broadened bases, lowered rates, and modestly cut state revenues, and ostensibly has not turned New York into Kansas.
Consider also this 2015 post from CBPP, “Kansas Isn’t the Only Tax-Cutting State with Budget Woes,” which warns that:
- North Carolina would face a budget deficit in 2015 due to tax cuts
- Pennsylvania’s $2 billion budget deficit that year was caused by a multiyear phaseout of the state’s capital stock tax
- Wisconsin’s revenues were scheduled to come in below state needs
All three claims were flawed. North Carolina in fact ended up closing the year with a $447 million surplus in FY 2015. In Pennsylvania, the author conceded in the piece that the capital stock tax only collected $1 billion, and even that was at the tip of the prerecession bubble. Those following the Pennsylvania capital stock phaseout know that it was extended for years past the original repeal schedule, and I’d add that tax collections have grown dramatically in Pennsylvania if you bring the timeline back a few decades. Finally, in Wisconsin the author bases her claim of revenue insufficiency on tax receipts falling short of agencies’ budget requests. Agencies are known to submit essentially a wish list from which executives start to hone which budget and policy items they want to prioritize.
Lastly, consider a recent report from the Quad City Times of the Every Tax Cut is Kansas Card being employed in Iowa on the Senate tax policy committee a few months ago as legislators considered tax reform proposals: “Beware Kansas. That is the rallying cry across the country for Democrats who warn against tax cuts they think go too far.”
In reality, the tax reform that Iowa just passed will lower the top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate from 8.98 percent to 8.53 percent in the first year; a good start, but hardly Kansas-level slashing. Once fully phased in, the Iowa reform reduces the top individual income tax rate to 6.5 percent, but does so by broadening the income tax base, repealing the deduction for federal income taxes paid, which is a significant base-narrower in the state.
The corporate rate will be similarly cut from highest-in-the-nation 12 percent to 9.8 percent by removing the same deduction and tightening special corporate tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.Subscribe
Time for a New Ground Rule
It is important to note that we at the Tax Foundation have been critical of Kansas’ 2012 tax reductions for a variety of reasons. The revenue cuts themselves were quite large, $900 million on a $6 billion general revenue fund, and lawmakers never sufficiently put forward a spending reduction plan to make the numbers add up. The income tax cut exempted a significant class of income entirely from taxation, leading to inequities and revenue unpredictability. In future sessions, as the wheels came off, legislators relied on discriminatory targeted tax hikes and budget gimmicks to close out sessions instead of addressing the underlying tax structure.
Over five years, many policy reports, and multiple trips to Topeka to testify and educate policymakers, the state advanced a fix that we view as an improvement to the tax and budget system. Make no mistake, Kansas’ attempt at tax reform has been tumultuous, and many poor policy decisions were made. But this has not been the experience of most states.
We must get some details back into the tax reform debate beyond these poor simplistic reflexes. My colleague Jared Walczak recently astutely tweeted:
Over the past decade, 19 states that aren’t Kansas have cut their individual income taxes. That Kansas is always the one cited shows pretty clearly that most states *don’t* go that route. It’s incumbent upon critics to SHOW how this plan is like Kansas’s, not just shout “Kansas!” https://t.co/yjq9TC5Run
— Jared Walczak (@JaredWalczak) May 9, 2018
This should be the new rule, and we have a new resource to start: My colleague Nicole Kaeding and University of Central Arkansas economics professor Jeremy Horpedahl just published a great paper telling the play-by-play stories of states that successfully accomplished tax reform, and how they balanced revenue demands with economic growth priorities and fairness. They took the time to include an analysis of Kansas’ failed attempt at tax reform too, just to contrast approaches that work and ones that don’t.
What readers will find is that if your state is considering a tax cut that amounts to more than 10 percent of the general fund, that kind of sounds like Kansas. If your state is looking to provide a large deduction or complete exemption of pass-through income, that kind of reminds me of Kansas. But if your state is considering modest reductions in corporate and individual income taxes over a multiyear period paired with base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. , that reminds me more of the District of Columbia’s 2014 tax reform than Kansas in 2012.
The next time someone tells you a tax proposal is like Kansas, ask how. How big is it? How does the structure compare? Pay close attention to the answer, because if it is just “you are cutting income tax rates,” that is insufficient. As much as former Kansas Governor Sam Brownback (R) might like to think so, he did not invent income tax rate cuts.Share