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Combating inflation at the state level

Combating inflation at the state level

Last Friday, the Dow Jones Industrial Average plummeted by 1,000 points after Federal Reserve Chair Jerome Powell indicated that interest rates would remain high to fight inflation. Kansans don’t need to be told that inflation is rampant as prices this July were 8.6% higher than what they were last year. Much of the broader causes of inflation like foreign affairs or big federal spending are out of the control of Kansas legislators, but concrete steps can be taken to help Kansans as prices remain high. Reducing taxes would help fill the big holes burning in wallets across the Sunflower State.

Inflation’s Consequences

According to estimations by the Congressional Joint Economic Committee, Kansans are facing an additional monthly cost of $730. That’s the average rent for a two-bedroom home across the state at $742 per month. At a gas price of $3.50, a car that gets 20 miles per gallon could make the round trip between Overland Park and Dodge City 6 times for $730. In the Kansas City area, the cost of chicken has quadrupled. A beef sandwich at the legendary Kansas City, Missouri barbeque restaurant Arthur Bryant’s cost $10.95 in 2021: that price is now up to $17.95, a 63.9% increase.

That $730 doesn’t include the additional costs when it comes to tax time. Consider the very simplified example of a Kansas married couple and their two kids with $75,000 in income last year. They take the standard deduction but don’t have any tax credits including the federal child tax credit. A pay increase to offset 9% annualized inflation would boost gross pay by $6,750, but the net after income and payroll tax only goes up $5,058.  Federal income tax is $810 higher, state income tax goes up $367, and Social Security and Medicare taxes take a $516 bite out of the pay increase.

And that’s just what comes out of their paycheck. School districts, cities, and counties are next in line with property tax increases. All the while, sales taxes are ticking up too with higher prices.

Not to mention that income increases to offset inflation aren’t keeping up either. From April 2021 to April 2022, Kansans’ average nominal weekly earnings increased by 7.4% while inflation for the Midwest was 8.2%. On an annualized basis, the average Kansan worker may appear to have gained $3,501 more in their wages but they’d need another $381 in annual wages just to tread water.

Tax Solutions

An existing inflation fix that occurs at the federal level is the indexing of tax brackets. That is, tax brackets will increase with inflation to reflect that income growth from inflation isn’t a real expansion of earnings and wealth. Twenty states have some form of inflation indexing for tax brackets, standard deductions, or personal exemptions. But Kansas does none of these, and these are the most basic steps that should have broad support.

Going further, Kansas families need real tax cuts to help offset the cost of inflation. With the state regularly exceeding monthly tax revenue and sitting on staggering reserves we need changes to keep the cost of living low in Kansas. The Sunflower State is the third least tax-friendly state for retirees according to Kiplinger’s.

But, one-time relief options like a “gas tax holiday” may seem nice at first. Unfortunately, they have few long-term effects while exacerbating inflation by increasing debate while markets (i.e., energy supply chain issues with Russia’s invasion of Ukraine) are already tight. Instead, long-term relief should be the way to go. Lasting income tax cuts for everyone keep cash in people’s pockets and stimulate the economy: tax cuts for people with lower incomes have resulted in high employment growth.

Of course, any discussion of tax cuts in Kansas causes the usual callback to the Brownback Tax Cuts. But today, twenty-five states have lowered their income taxes since Kansas’s tax cuts in 2012. Dropping tax revenues by hundreds of millions of dollars while not committing to reductions in spending causes a deficit, as discussed in KPI’s book What Was the Matter with the Kansas Tax Plan?.

Tax cuts require spending reductions, but operating more efficiently at the state and local level has hundreds of millions of dollars of opportunity. KPI’s Responsible Kansas Budget discusses policies like capping budget growth to inflation and population growth combined with regular upkeep of the state’s rainy-day fund.

Reducing the cost of government is another way to take a financial burden off families’ backs. Reducing regulatory bureaucracy with any of the innovative policies being implemented around the country like Right to Earn Living movements, occupational licensing reform, regulatory sandboxes, or greater regulatory review can address the supply-side issue of inflation by reducing the cost to do business, ship goods, and meet demand.

For five decades, Kansas has been falling behind in economic factors like job growth as nearby states like Colorado have seen their economies boom through innovative policies. Helping families with inflation is one step to comprehensive tax reform to put Kansas on the map as a real competitor. The first steps are to have honest conversations about spending and taxation.