Liberals take great pleasure in bashing Kansas Gov. Sam Brownback (R). They call him nasty names on social media. I have never believed name-calling was a particularly effective debate tool. Yet, the age of electronic communication seems to have turned everyone into an 8-year-old. And Brownback, more than any other politician, has borne the brunt of the tiresome trend of substituting personal attacks for reasoned policy debate.
Beyond the juvenile attacks, Brownback has been skewered by organizations I admire a lot. The Tax Foundation has been harsh in its criticism. The Institute on Taxation and Economic Policy, not surprisingly, has been harsher. At least the foundation and institute are advancing ideas in their critiques. The odd thing about the Kansas debate is that Brownback was vilified when he cut taxes. He was then vilified when he proposed raising taxes. He was accused of making the system more regressive. But he was given no credit for proposing to remove the poorest folks in Kansas from the tax rolls.
I think Brownback had the right idea and the wrong approach. He wanted to reduce tax burdens on Kansas citizens. That is laudable for two reasons. First, in the long run, lower taxes will lead to greater economic growth. Second, the money belongs to Kansans. Politicians don't have an inherent right to people's property. And it doesn't matter whether lawmakers' motivations are noble or venal -- it's not their money.
But I think Brownback made a terrible error when he exempted from tax all income from passthrough entities. If you are a partner in a Kansas law firm, your profits are tax free. If you are an associate or administrative assistant working for that partner, your salary is taxable. There is nothing right or just about that. Treating those sources of income differently is bad tax policy. The big effect of the exemption was to create more passthrough entities.
Moreover, the exemption for passthroughs is what blew a giant hole in the budget. The state's finances would have been fine had Brownback stuck with his income tax cuts. But they couldn't survive the passthrough exemption.
Brownback has now recognized his mistake, although I doubt he will admit it publicly. His admission comes in the form of a May 30 tax increase proposal. While I'm as antitax as anyone who makes his or her living in the tax business, sometimes you need more tax revenue. And in Kansas, that's now.
Brownback is not dialing back the exemption for passthrough income as he should. Instead, he has proposed to increase the sales tax rate from 6.15 percent to 6.65 percent, increase the cigarette tax by 50 cents a pack, and eliminate just about every income tax deduction. He would keep the charitable deduction and allow a 50 percent deduction on home mortgage interest and property payments. Most telling is his proposal to remove 388,000 low-income Kansans from the tax rolls.
Are these good ideas? The sales and cigarette tax increases will add to the regressivity of the system. Most economists (including a lot of liberal economists) like consumption taxes. But creating a more regressive system is not good. It certainly won't endear the governor to his liberal detractors -- more name-calling is sure to be on the way. But Brownback is proposing to eliminate a lot of income tax deductions. Any way you look at it, eliminating deductions is a good idea. And the governor is proposing to remove many poor people from the tax rolls. You would think liberals would applaud that, but I suspect they won't. Reducing the income tax burden will likely offset the modest sales tax increase, with respect to the overall effect on regressivity. Overall, the governor's ideas are pretty good.
I think Kansas should repeal the exemption for passthrough entities. There is no economic or tax reason for exempting income earned through an LLC or a partnership. In fact, exempting such income is contrary to the accepted principles of sound tax policy. But at least the governor and the GOP in the legislature are recognizing that the tax cutting went too far.
This post is an excerpt of an article that appeared in State Tax Notes.