Lauren Loricchio: Hi, I'm your host, Lauren Loricchio. And on today's episode, we'll discuss recent major changes to the tax situation in Kansas. In 2012, with the election of Republican Gov. Sam Brownback, Kansas began what has come to be known as the experiment. Brownback and many others bet that if they sharply lowered income taxes and even phased out income taxes for one group, that the state would then usher in a wave of economic development and growth. State Tax Today reporter Maria Koklanaris has followed the situation for several years. Maria joins me now to discuss the Kansas experiment and the results. Welcome, Maria.
Maria Koklanaris: Hi, Lauren.
Lauren Loricchio: First, can you briefly give us some background?
Maria Koklanaris: Sure, well, as you said, Gov. Brownback, a Republican, was elected in 2012. And in 2012 and 2013, Kansas restructured and greatly reduced income taxes. And it also became the first state to completely exempt passthrough businesses, which are businesses such as LLCs and partnerships, completely exempted them from taxation. And as you noted, Gov. Brownback and other lawmakers hoped that by doing this, it would spark a wave of economic development and growth.
Lauren Loricchio: So did it?
Maria Koklanaris: It did not. The next few years were closely watched all over the country because if Kansas had succeeded, it would have been a blueprint for other Republican-controlled states. Many of them would have tried the same thing or something similar. But as it turned out, things in Kansas did not go as they had hoped. Far from a wave of growth, the state had a lot of trouble even making monthly revenue targets. Most months it didn't. Its budget deficit from fiscal 2018 and 2019 was estimated at close to $1 billion.
Lauren Loricchio: What about education funding? I heard that was also an issue.
Maria Koklanaris: It was, in addition to the problem of low revenue, Kansas was facing a decision by the Kansas Supreme Court that the state has not been properly funding its schools. So they lacked money both for their coffers, and to satisfy the state supreme court order.
Lauren Loricchio: And what is the root of the problem the state has had since implementing its tax cuts?
Maria Koklanaris: Well, as with most things, that depends on who you ask. But one aspect of the tax cut package has been roundly panned by nearly every group I know of that studies tax policy. And that is the 0 percent rate or the complete exemption of income from passthrough businesses. A couple of states do have partial exemptions for this income, but Kansas was the first to have a full exemption. And when it was passed, state officials estimated that 191,000 businesses would take advantage of the exemption. So they based their revenue targets and estimates going forward on that figure. But the number actually ended up being 330,000 businesses. So in addition to the revenue that that cost the state, the tax policy group said the problem with that exemption is that it's a classic example of what they call picking winners and losers. And in this case, the government picked the passthrough businesses as winners and exempted them from taxation.
Lauren Loricchio: Were there any other concerns?
Maria Koklanaris: Yes, groups on the more liberal end of the spectrum blame the entire tax package for the revenue problem in Kansas. They say that Kansas's tax rates were not that high to start with, and there was no reason for the government to so sharply cut them across the board, and even to cut them to zero for the passthrough businesses. Other groups, mostly on the more conservative end of the spectrum, had no problem with any of the tax cuts, and that included the passthrough exemption. They thought that was all fine, and even appropriate. But Kansas had trouble, they said, because it should have cut spending and failed to do so.
Lauren Loricchio: I understand that this tax policy has had opponents all along, and that some in the Legislature have made several attempts to repeal or change it. But for a long time that was unsuccessful?
Maria Koklanaris: Yes, lawmakers actually got very close to repeal in February, but as expected, the governor vetoed the legislation that would repeal what was essentially his signature tax policy. So the House was able to override his veto at that time, but the Senate fell a few votes short. Very late on the night of June 6, however, that changed. This time, both chambers were able to garner enough votes to override Gov. Brownback's veto of S.B. 30, a bill that would raise $1.2 billion over two years by raising the income tax rates and ending the exemption for the passthrough businesses. It was actually a very historic night in Kansas as legislators, including many Republicans, and the Republican House speaker, voted to defy their governor and end the experiment. I spoke to one Republican House member the next day, and she told me that she hoped the night would be the beginning of a return to the Kansas she knows and loves. She has lived in the state her entire life. And she said it's one that makes its revenue targets, funds its schools, and as she put it, is quiet, boring, and polite.
Lauren Loricchio: Thanks for joining me today, Maria. I know we'll be keeping a close watch on the state's fiscal situation and it will be interesting to see how other states handle the tax cuts after this as well.
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