Many parents will soon be faced with the annual Christmas wish list dilemma – deciding how much of their kids’ list they can afford without inflicting economic turmoil on the family. A lot of new legislators will face the same challenge come January, as granting everything on the vote-for-me list would require enormous tax increases on individuals, which in turn would negatively impact the Kansas economy. Government granting wishes to spend more on schools, highways, Medicaid / Obamacare expansion, and reducing the sales tax on food would cost about $1.25 billion.
Eliminating the pass-through exemption would only generate $200 million (if that) and with no reserves left in the bank, at least the first two years of that new tax would be needed to get reserves up the statutorily-required level. And while the pass-through exemption raises a legitimate fairness discussion, eliminating it would very likely reduce employment since new Census data shows that 82 percent of new jobs in 2013 and 2014 came from pass-through entities.
Fairness can still be addressed by putting all fairness issues on the table and crafting a solution that doesn’t harm the small business engine; if not for jobs coming from new startups, Kansas would only have had two years of private sector job growth between 1977 and 2013. We can still address fairness but that requires putting policy ahead of politics.
Granting $1.25 billion in spending wishes would require a 56 percent across-the-board income tax hike on individuals, causing Kansans to pay much higher rates than pre-2012. Alternatively, raising taxes on those earning $100,000 or more – such as a teacher and a police officer in the same family – would require a 93 percent increase on those folks. Many people aren’t aware that the pass-through exemption only accounted for 29 percent of tax reform; individuals got the lion’s share of relief with double-digit declines in income tax liability at all income levels.
But even if some of the new legislators want to raise taxes, they’ll soon learn that that would have very little impact on the current fiscal year and not much more on the next year. Making government operate a little more efficiently is the only practical option to deal with near-term budget challenges and fortunately, there are many options to do so – if fiscal responsibility can be put ahead of politics. In 2015, the ten states that tax income spent 46 percent more than those without an income tax; Kansas spent 34 percent more. Simply put, states that provide the same services as better prices don’t need as much tax revenue.
Democrats and many Republicans in the last Legislature were unwilling to stand up to the special interests that profit from excess government spending but perhaps more of the newly-elected will put citizens and fairness ahead of politics. Examples abound of inefficient government spending so why should anyone’s taxes be increased so that government can continue spending more than necessary?
A version of this commentary ran in The Wichita Eagle on November 27, 2016