Kansas is a cautionary tale for Arizona

Thomas Frank in his tome What’s the Matter with Kansas?: How Conservatives Won the Heart of America addressed the conundrum that is Kansas. From the Amazon.com review:

DorothyThe largely blue collar citizens of Kansas can be counted upon to be a “red” state in any election, voting solidly Republican and possessing a deep animosity toward the left. This, according to author Thomas Frank, is a pretty self-defeating phenomenon, given that the policies of the Republican Party benefit the wealthy and powerful at the great expense of the average worker. According to Frank, the conservative establishment has tricked Kansans, playing up the emotional touchstones of conservatism and perpetuating a sense of a vast liberal empire out to crush traditional values while barely ever discussing the Republicans’ actual economic policies and what they mean to the working class. Thus the pro-life Kansas factory worker who listens to Rush Limbaugh will repeatedly vote for the party that is less likely to protect his safety, less likely to protect his job, and less likely to benefit him economically.

This Republican tribalism, voting against one’s own economic self-interest out of allegiance to cultural touchstones and identity politics may finally be coming to an end.

Screenshot-14Governor Sam Brownback, a theocratic anti-abortion crusader and a true believer in faith based supply-side “trickle down” GOP economics has effectively ruined the economy of his state with tax cuts that did not magically produce the unicorns and rainbows he promised. As a result, Governor Brownback trails his Democratic challenger for reelection this fall. Governor behind in latest KSN News Poll:

Four months out and the KSN News Poll shows sitting Kansas Governor Sam Brownback losing to his Democratic challenger, Paul Davis in the November General Election. In that race, Davis leads Brownback 47% to 41% with a margin of error of +/- 3.1%.

Josh Barro of the New York Times’  The Upshot explains what is obvious to any right-thinking individual with a modicum of economic sense who is not blinded by faith in the disproved and discredited supply-side “trickle down” GOP economics: Yes, if You Cut Taxes, You Get Less Tax Revenue:

Kansas has a problem. In April and May, the state planned to collect $651 million from personal income tax. But instead, it received only $369 million.

In 2012, Kansas lawmakers passed a large and rather unusual income tax cut. It was expected to reduce state tax revenue by more than 10 percent, and Gov. Sam Brownback said it would create “tens of thousands of jobs.”

In part, the tax cut worked in the typical way, by cutting tax rates and increasing the standard deduction. But Kansas also eliminated tax on various kinds of income, including income described commonly — and sometimes misleadingly — as “small-business income.” Basically, if your income results in the generation of a Form 1099-MISC instead of a W-2, it’s probably not taxable anymore in Kansas.

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While no state has gone as far as Kansas, four others — Missouri, Ohio, Oregon and South Carolina — have passed laws in the last decade that give some small-business owners lower tax rates than wage earners.

By creating this preference for some types of income over others, Kansas has run into at least five problems:

It’s sometimes possible to turn taxable salary income into untaxed “business” income.

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Jim Dunning Jr., managing partner of Dunning & Associates C.P.A.s in Wichita, says he has seen a few clients change the way their businesses are incorporated to take advantage of the tax law. Many small firms are structured as S-corporations, and federal law requires an S-corporation’s owner-managers to pay themselves at least a “reasonable” salary. But by converting to a limited liability company, or L.L.C., owners can set their salaries to zero and take all of their income from the company as profits, thus avoiding any Kansas tax.

A lot of the beneficiaries of the tax break won’t be small businesses.

Many are sole proprietors like me, who are fundamentally engaged in labor, not entrepreneurship, and aren’t likely to hire anybody just because they receive a tax break.

At the other end of the spectrum, there’s no size limit on “small businesses” as defined by Kansas and the Internal Revenue Service. The Kansas tax break does not extend to C-corporations, the typical corporate form used by large publicly traded companies. But large companies can be structured in forms typically used by small businesses. For example, as of 2005, only 0.2 percent of business partnerships — which Kansas counts as small businesses — had earnings of more than $50 million, but they accounted for 57 percent of all partnership earnings.

The investment giant Fidelity Investments converted from a C-corporation to an L.L.C. in 2007, and thus stopped paying corporate-level income tax. Fidelity’s owners pay federal tax on the share of Fidelity’s income attributable to them, but in Kansas the income would not face state income tax at either the corporate or the individual level.

It’s not clear that there’s anything special about small businesses for the purpose of job creation.

A 2013 study by economists from the Census Bureau and the University of Maryland found that while young firms add jobs more quickly than older ones, the size of a firm does not appear to drive job growth.

And indeed, while Governor Brownback wrote last month that the tax cuts were allowing businesses to “hire more people and invest in needed equipment,” job growth in Kansas has been modest since he signed the bill, trailing the national average and the rate in three of its four neighboring states.

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Some of the revenue loss doesn’t even benefit taxpayers.

Let’s say you own an L.L.C. in Kansas but live in Oklahoma. Mr. Dunning, the accountant in Wichita, described clients in this situation who have oil and gas interests along the state border. The tax change in Kansas relieves those business owners of their obligation to pay income tax to Kansas — but they also lose a credit on their Oklahoma tax returns for taxes paid to Kansas, so they just end up paying more to Oklahoma. This provides no particular incentive to do business in Kansas.

Small-business owners who switch from an S-corporation to a limited liability company also face a federal tax hit that partly offsets their Kansas tax savings, again enriching another government at Kansas’ expense, and blunting the tax changes’ benefit to businesses. All of which brings us to the last issue.

The state budget is suffering.

Of course, lawmakers in Kansas knew when they passed the tax cuts that this would happen; the question is whether they will lose even more revenue than they expected over the long run.

The Kansas Legislative Research Department — the state-level equivalent of the Congressional Budget Office — issued a memo this month saying that “it appears that some of the fiscal notes associated with various income tax law changes enacted in 2012 and 2013 were understated.” Translation: It looks as if we gave out a bigger tax cut than we thought.

The “fiscal cliff” at the end of 2012 induced people to shift whatever income they could into 2012 to take advantage of low capital-gains tax rates before they went up. That lifted income tax collections, but only for one year (2013, when final payments for tax year 2012 were made). As a result, income tax receipts in 2014 are lower than they were in 2013, and many states underestimated just how much they would drop.

But Kansas missed by more than most. According to data collected by the Rockefeller Institute, of 17 states that produce public monthly income tax revenue projections, Kansas’ April error — off by 28 percent — was by far the largest. No other state missed by more than 16 percent, suggesting that a failure to anticipate falling capital gains tax revenue was not the only problem in Kansas.

Christopher Ingraham of the Washington Post’s Wonkblog adds, Tax cuts in Kansas have cost the state money and jobs:

Gov. Sam Brownback of Kansas took to the pages of the Wall Street Journal last month to tout the success of his economic program, particularly several rounds of income tax cuts amounting to the largest in the state’s history. “We supported small business by taking away all income taxes on small businesses,” Brownback wrote, “allowing them to reinvest in their businesses, creating jobs and growth. … By giving these companies more money to reinvest in their businesses, we are enabling them to hire more people and invest in needed equipment.”

The only problem? That job growth hasn’t exactly materialized. In fact, as Josh Barro notes in a must-read over at The Upshot today, job growth in Kansas has actually lagged behind the U.S. average, especially in the years following the first round of Brownback tax cuts in 2012.

KStax_cuts

Earlier this year, my colleague Niraj Chokshi reported on a Center and Budget Policy Priorities study of Kansas’ cuts. In an unusually frank assessment from the nonpartisan think tank, the study’s authors concluded that “Kansas is a cautionary tale, not a model. As other states recover from the recent recession and turn toward the future, Kansas’ huge tax cuts have left that state’s schools and other public services stuck in the recession, and declining further — a serious threat to the state’s long-term economic vitality. Meanwhile, promises of immediate economic improvement have utterly failed to materialize.”

Every month brings fresh economic news that further validates these findings  job creation in Kansas has remained essentially flat since last fall, even as employment increased in the rest of the country.

Kansas is a cautionary tale for Arizona. Due to tax cuts passed by our Tea-Publican legislature that will be phased in over the next few years, Arizona’s structural revenue deficit will worsen, resulting in a budget shortfall by FY 2017. Arizona’s lost decade due to GOP magical thinking and fiscal mismanagement of the state.

Wizard-of-Oz-behind-the-curtainTwo of the leading GOP contenders for governor this year are “Cathi’s Clown” Doug Ducey, and Ken “Birther” Bennett, both of who are running on a platform of eliminating Arizona’s modest personal income tax — it will magically produce unicorms and rainbows! — it will also drain $4.3 billion out of state coffers, nearly half of the state’s $9.2 billion budget next year. Bennett has proposed eliminating sales tax exemptions in order to tax goods and services not currently taxed (how he intends to achieve the two-thirds super-majority vote in each chamber of the legislature as required by Prop. 108 (1992), he does not say).

As Michael Bryan explains in Leading AZ GOP Governor Candidates Want to Eliminate State Income Tax, and Why That’s a Terrible Idea, “The bitter truth is that the state would become even more dependent on regressive sales taxes and higher property tax rates, and essential state services will have to be cut dramatically.”

Neither Doug Ducey nor Ken Bennett should be considered serious candidates by the voters of Arizona. They should be mocked and laughed off the stage. They are charlatans, like the Wizard of Oz, and they would destroy what remains of Arizona’s economy after 22 years of faith based supply-side “trickle down” GOP economics and tax cuts. Arizonans cannot afford to “ignore the man behind the curtain.”

3 responses to “Kansas is a cautionary tale for Arizona

  1. They play up wedge issues, which are easier to understand and more divisive. Just like religion, people are socialized into their political party and few question it. Here we are.

  2. This whole Kansas fiasco is a premier example of what happens when government decides it will manage the economy by tinkering with the tax codes. People are not stupid and accountants are trained to read the new tax codes and find where there are opportunities to improve the position of their clients. These are then discovered months later by politicians (whose accountants have already made sweet deals for them by using it) and are referred to as “tax loopholes”, as if some underhanded slimy lawyer had found a way around the law rather than the truth which is that the law was sloppily written.

    Government has a long and inglorious record of mishandling and mismanaging money. While I applaud their intent, Kansas approached these tax cuts in a disastrous way. They cut the wrong taxes and wrote the law without considering the unintended consequences of the taxpayer adjusting his position to take advantage of the new laws. That was stupid of them.

    Of course, if they elect a Democrat governor, he will declare an emergency and try and get emergency taxes passed right and left. He won’t correct the current problems, but he will create new ones. I feel bad for Kansas, they are decent people who don’t deserve this.

  3. Great book but scary.