Tax Analysts Blog

Republican Support for Brownback's Tax Plan Begins to Erode

Posted on Jun 2, 2015

Kansas was supposed to be a Republican success story. It elected a conservative governor who happened to be a former U.S. senator, and he, unlike many of his colleagues, followed through on his promises to radically overhaul his state's tax system, lowering rates and drastically reducing the burden on Kansas taxpayers. A legislature dominated by GOP lawmakers supported his plan, and the state doubled down on supply-side economics. But then everything started to go wrong.

Gov. Sam Brownback's tax plan wasn't all that well conceived to begin with, so some of the problems that have arisen were predictable. The signature part of Brownback's plan was to exempt virtually all passthrough income from tax. The idea was that small businesses were mostly organized as passthroughs and that this exemption would encourage both job formation and relocation. That hasn't really happened. Instead, the exemption is hard for many small business owners to understand and has probably overwhelmingly benefited wealthy taxpayers, who have primarily non-wage income. So the supply-side benefits haven't yet materialized in Kansas.

But the revenue shortfalls have. Kansas faces a $400 million budget shortfall, which is significant for a state that spends only about $6.5 billion a year. (Some argue that the shortfall is even higher.) Republican lawmakers have done everything they can, short of tax increases, to close that gap. Brownback cut some expenditures by 4 percent and slowed contributions to the state pension system. Some in the state Senate want to go even further in cutting noneducation spending, but it's hard to see how much revenue can truly be raised from simply dealing with the spending side.

The grim reality of the budget situation has caused some moderate Republicans (who traditionally dominated Kansas politics until the rise of the Tea Party and Brownback's more conservative wing of the party) to join with Democrats to push for some tax increases. Sen. Les Donovan (R), the Kansas Senate's chief taxwriter, has called for increasing the sales tax to 6.5 percent and replacing the non-wage exemption for small businesses with a 1 percent payroll credit.

The governor, however, is not in favor of undoing any part of his signature achievement, despite the revenue situation. Over the weekend, he finally responded to lawmakers' pleas to give some indication of what kind of tax increase he might sign. (Republicans were reluctant to vote for a tax bill that Brownback would veto.) Brownback called for an increase in the sales tax to 6.65 percent, elimination of itemized deductions, and a cigarette tax increase of 50 cents per pack. He claimed his plan would reduce the budget deficit to $81 million this year and $255 million next year. The governor also made it clear that he would veto anything that rolled back the tax cuts passed in previous years (in other words, no changes to how passthroughs are taxed and no changes to income tax rates).

Brownback's statement probably provides a pathway to a final bill and an end to a legislative session that has already run over its usual 90 days. However, it's not clear that his proposals will raise enough revenue to solve Kansas's problems in the long term. Donovan's support for undoing some of the controversial tax reform is an ominous sign for the future of at least the passthrough exemption. It's likely that more and more Republicans will come to the same conclusion as the revenue shortfalls continue to mount.

Read Comments (3)

Michael KarlinJun 3, 2015

Notice how the Republican solution, if forced into some sort of tax hike, is a
regressive sales tax instead of a progressive income tax.

edmund dantesJun 4, 2015

Compare the more successful Republican tax cut plan in North Carolina.
[That WSJournal item may be behind the paywall].

According to the article, after the tax rates were cut the revenue collected
went up. Key bits:

An even bigger surprise—even to supporters—is the tax cut’s impact on revenue.
Even with lower rates, tax revenues are up about 6% this year according to the
state budget office. On May 6, Gov. McCrory announced that the state has a
budget surplus of $400 million while many other states are scrambling to fill
gaps.

"This is the opposite of what has happened in Kansas, where jobs have been
created but revenues have fallen since the top personal income-tax rate was cut
from 6.45% in 2012 to 4.6% today and the income tax for small business owners
who file as individuals has been eliminated. North Carolina’s former budget
director, Art Pope, says one difference between the two states is that “we cut
spending too. Kansas didn’t.”"

mr. sal s.Jun 7, 2015

Unfortunately, The WSJ article doesn't tell us that the surplus was an
unexpected and one-time occurrence. In the long-run, North Carolina's new tax
policy will hurt the middle and lower classes because of cuts in important
services, infrastructure, education, etc. as well as an actual overall increase
in their taxes.

Republican and conservative policies are too simplistic and myopic. Somehow,
they think jobs will magically appear with tax cuts, while ignoring everything
else that's important.

Raising the sales tax is indeed regressive and actually runs counter to typical
Republican and conservative policy in that some businesses will lose business
because, where possible, customers will choose to make purchases where they can
find jurisdictions with lower sales tax rates. For those who can't, a larger
portion of their income will now go to paying taxes.

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