President Donald Trump rode to the White House promising a giant cut in federal taxes. Last week, his job got a bit harder — thanks to some Republican state legislators in Topeka, Kansas.
Kansas, whose economy ranks 30th among states, may not drive the national economic conversation as frequently California or Texas do. But the state’s dramatic 2012 tax overhaul was heralded as a model for the nation, with a number of provisions later adapted for the national tax plans proposed by President Trump and other Republicans.
Now, however, the legislature has voted to backtrack — setting the stage for a showdown with Gov. Sam Brownback, who said on Tuesday that he would veto the measure, according The Wichita Eagle. While the outcome for Kansas is still in doubt, the Republican-led legislature’s reversal makes it trickier for Kansas to serve as a template for national tax reform.
Five years ago, the Sunflower State embarked on an economic experiment: Sharply cut taxes — especially on business owners — in hopes of driving economic growth. The Brownback-led overhaul consolidated the state’s income-tax brackets from three to two and exempted non-wage small business income from state income tax altogether. The changes were controversial, especially because the legislature declined to offset some lost revenue by curbing tax breaks, raising the prospect of large budget deficits. But Brownback insisted the plan would act as a “shot of adrenaline into the heart of the Kansas economy,” and later touted it as blueprint for the nation.
On the latter front, he’s largely succeeded. As a number of observers have noted, tax-cut plans put forward by both Donald Trump and House Republicans echo a number of features from the Kansas plan, including consolidating federal income-tax brackets — the national plans reduce the number from seven to three — and taxing small business income at sharply lower rates.
And like Brownback, Trump has put spending cuts, which could help balance the budget in face of lost revenue, on the back burner — preferring to focus on the more hopeful notion that tax cuts will “unleash America’s economy, creating millions of new jobs and boosting economic growth.”
Unfortunately, that part of the plan — what Brownback called an economic “shot of adrenaline ” — hasn’t materialized. The state’s budget deficit ballooned to $350 million. And the small-business provision also created new ways for residents to avoid taxes, meaning more lost tax revenue and compliance headaches for the state. University of Kansas basketball coach Bill Self, the state’s highest-paid state employee, created a local media frenzy when it came out that he had evaded state income tax on the vast majority of his income by having the state direct $2.7 million of his compensation to a small business he created.
Last week, the Kansas state legislature cried uncle. Both the state house and senate passed bills on Friday that would restore the state’s third income tax bracket and eliminate the special income-tax exemption, which has been used by more than 300,000 business owners, according The Wichita Eagle. If Brownback makes good on his threat to veto the law, the legislature could try to override him, or send him the same bill a second time, in an effort to heighten political pressure on the governor, the paper reported.
Kansas’ woes — and the recent reversal — are likely to deliver new artillery to liberals eager to derail Trump’s tax plans. Some have already been holding the state up as an example of tax-cut overreach.
They might find allies on right, too. Aspects of Kansas’s tax reform, including ones that have been picked up by Trump and other national Republicans, have met with criticism from right-leaning groups that generally favor tax cuts.
The Tax Foundation, whose economic analysis tend to be bullish on tax cuts, has criticized Kansas’s decision to offer a special tax break on small business owners’ income. “It’s important to note here that while decreasing taxes is generally associated with greater economic growth, the pass-through carve out is primarily incentivizing tax avoidance,” the group concluded last year — “not job creation.”