Legislators Maneuver in Kansas’ Income Tax Reform Debate

The Kansas House has approved a major tax cut bill and sent it to the Governor’s desk. The bill would reduce marginal tax rates, repeal a number of income tax credits, and increase the standard deduction, among other provisions. On net the bill is estimated to reduce revenue by $231 million in 2013 and $803 million in 2014.

The interesting twist in this story is that this bill was actually killed by the Senate in March, over concerns about the cost (Tax Analysts, subscription req’d). However, only a few hours later the Senate revived the bill in a procedural move designed to keep alive the broader tax reduction debate and negotiation. A House-Senate conference committee was working on a compromise bill that would have phased-in the tax cuts less quickly and reduced taxes by about $61 million in 2013 and $191 million in 2014.

However, some House members we apparently not satisfied with the direction or pace of the negotiations, and decided to apply some pressure. They decided to pass and send to the Governor the more costly killed-then-resurrected Senate bill. Governor Brownback has said that he is willing to sign the bill, but has also seemed to indicate that he is open to less costly solutions:

I am prepared to sign the bill but I encourage Kansas Legislators to continue their work on reforming our state’s tax policy and to consider some of the alternatives I proposed in my original pro-growth tax reform to off-set the cost.

Some of the Governor’s proposals went farther than the bill on his desk by eliminating more tax credits and most itemized deductions. His proposals also included freezing a scheduled sales tax rate reduction which is set to reduce the rate from 6.3% to 5.7%.

All of the proposals being discussed in Kansas cut marginal tax rates and broaden the tax base to some extent. This is good. While different experts might disagree on some of the details, they generally agree that broad tax bases and low tax rates are central features of good tax policy. Broadening the base alone (eliminating tax preferences such as credits, deductions, exemptions, etc.) will tend to increase revenue, while lowering tax rates will obviously decrease revenue. Theoretically, any tax reform could be structured so that the rate cuts exactly offset the base broadening provisions. This would be the so-called “revenue neutral” approach. If a plan does more rate-cutting than base-broadening, the reform will reduce revenue. On the other hand, more base-broadening and smaller rate cuts would increase overall revenue (this scenario does not appear to be on the table in Kansas).

Revenue neutral tax reform is generally a good idea,* but cutting the overall tax burden can be beneficial as well. It appears that the disagreement in Kansas is over whether the reform should be a large net tax cut or something closer to revenue neutrality. It will be interesting to see how the addition of this hefty bargaining chip on the Governor’s desk will change the debate.

For previous posts about the evolving efforts at income tax reform/reductions in Kansas see here, here, and here.

*assuming the base-broadening eliminates distortionary tax preferences and not certain provisions that are arguably justifiable in order to get the tax base right (e.g. deductions for business expenses, net operating losses, etc.).