Tag Archives: Kansas

States Aim to Eliminate Corporate and Individual Income Taxes

Although the prospects of fundamental tax reform on the federal level continue to look bleak, the sprigs of beneficial tax proposals in states across the US are beginning to grow and gain political support. Perhaps motivated by the twin problems of tough budgeting options and mounting liability obligations that states face in this stubborn economy, the governors of several states have recommended a variety of tax reform proposals, many of which aim to lower or completely eliminate corporate and individual income taxes, which would increase state economic growth and hopefully improve the revenues that flow into state coffers along the way.

Here is a sampling of the proposals:

  • Nebraska: During his State of the State address last week, Gov. Dave Heineman outlined his vision of a reformed tax system that would be “modernized and transformed” to reflect the realities of his state’s current economic environment. His bold plan would completely eliminate the income tax and corporate income tax in Nebraska and shift to a sales tax as the state’s main revenue source. To do this, the governor proposes to eliminate approximately $2.8 billion dollars in sales tax exemptions for purchases as diverse as school lunches and visits to the laundromat. If the entire plan proves to be politically unpalatable, Heineman is prepared to settle for at least reducing these rates as a way to improve his state’s competitiveness.
  • North Carolina: Legislative leaders in the Tar Heel State have likewise been eying their individual and corporate income taxes as cumbersome impediments to economic growth and competitiveness that they’d like to jettison. State Senate leader Phil Berger made waves last week by announcing his coalition’s intentions to ax these taxes. In their place would be a higher sales tax, up from 6.75% to 8%, which would be free from the myriad exemptions that have clogged the revenue-generating abilities of the sales tax over the years.
  • Louisiana: In a similar vein, Gov. Bobby Jindal of Louisiana has called for the elimination of the individual and corporate income taxes in his state. In a prepared statement given to the Times-Picayune, Jindal emphasized the need to simplify Louisiana’s currently complex tax system in order to “foster an environment where businesses want to invest and create good-paying jobs.” To ensure that the proposal is revenue neutral, Jindal proposes to raise sale taxes while keeping those rates as “low and flat” as possible.
  • Kansas: Emboldened by the previous legislative year’s successful income tax rate reduction and an overwhelmingly supportive legislature, Kansas Gov. Sam Brownback laid out his plans to further lower the top Kansas state income tax rate from the current 4.9% to 3.5%. Eventually, Brownback dreams of completely abolishing the income tax. “Look out Texas,” he chided during last week’s State of the State address, “here comes Kansas!” Like the other states that are aiming to lower or remove state income taxes, Kansas would make up for the loss in revenue through an increased sales tax. Bonus points for Kansas: Brownback is also eying the Kansas mortgage interest tax deduction as the next to go, the benefits of which I discussed in my last post.

These plans for reform are as bold as they are novel; no state has legislatively eliminated state income taxes since resource-rich Alaska did so in 1980. It is interesting that the aforementioned reform leaders all referenced the uncertainty and complexity of their current state tax systems as the primary motivator for eliminating state income taxes. Seth Giertz and Jacob Feldman tackled this issue in their Mercatus Research paper, “The Economic Costs of Tax Policy Uncertainty,” last fall. The authors argued that complex tax systems that are laden with targeted deductions tend to concentrate benefits towards the politically-connected and therefore result in an inefficient tax system to the detriment of everyone within that system.

Additionally, moving to a sales tax model of revenue-generation may provide state governments with a more stable revenue source when compared to the previous regime based on personal and corporate income taxes. As Matt argued before, the progressive taxation of personal and corporate income is a particularly volatile source of revenue and tends to suddenly dry up in times of economic hardship. What’s more, a state’s reliance on corporate and personal income taxes as a primary source of revenue is associated with large state budget gaps, a constant concern for squeezed state finances.

If these governors are successful and they are able to move their states to a straightforward tax system based on a sales tax, they will likely see the economic growth and increased investment that they seek.

Keep an eye on these states in the following year: depending on the success of their reforms and tax policies, more states could be soon to follow.

“Kansas Governor Rejects $13 Million in Future Taxes”

Okay, so that isn’t the real headline. The real headline reads: “Kansas governor rejects $32 million federal health care grant.”  But the two headlines may actually be the same.

First, some background: For years, economists have known that states that receive federal grants tend not to use the money to reduce their own spending (despite what theory would predict).  Since money seems to stick where it lands, public finance scholars have dubbed this phenomenon the “flypaper effect.”

Newer research by West Virginia University’s Russell Sobel and Charles Crowley takes this idea one step further. They find that even after the federal money goes away, state and local governments tend to increase their own taxes in order to maintain the same level of services. They found that for every $1.00 a state receives from the federal government, it tends to raise its own future taxes between $0.33 and $0.42. It seems that special interests come to depend on the money and lobby for its maintenance even after the “free” federal subsidy goes away.

So now to Kansas. There, Governor Brownback recently rejected a $32 million grant that was to help the state set up a health insurance exchange portal (i.e., a fancy website). In his statement, the governor wrote: “There is much uncertainty surrounding the ability of the federal government to meet its already budgeted future spending obligations.” So “Every state should be preparing for fewer federal resources, not more.”

Given the research of Sobel and Crowley, this would seem to be a valid concern. If the federal money goes away, the state can expect its own future taxes to rise by some $10 to $13 million.

Bans in Bars

Last week, two state legislatures voted on smoking bans. The bill in Kansas passed, but a similar bill in Indiana failed. With the new Kansas law, 38 states now restrict smoking in some public places, and 28 states forbid smoking in bars.

Proponents of anti-smoking legislation argue that second-hand smoke is dangerous and that state residents have a right to breathe clean indoor air. While medical evidence demonstrates that in fact second-hand smoke is a risk, these activists ignore that individuals are free not to patronize businesses that allow smoking, and businesses are free to ban smoking if they choose to do so.

A Michigan restaurant owner explains:

“Eleven years ago, there were 2,200 smoke-free restaurants in the state,” Deloney said. “Now there are more than 6,000. That’s a 174 percent increase.

“They know exactly what their customers want,” he said. “It’s not rocket science. To believe that because there is no state law there are no choices for smoke-free dining is ignorant.”

A study conducted by the National Restaurant Association suggests that smoking bans significantly hurt sales for many restaurants. This finding is unsurprising, since presumably restaurants design policies to maximize their profits. If they think that the majority of their profits come from people who prefer non-smoking areas, restaurants would voluntarily adopt such a ban. In Ohio, some taxpayers are disturbed that the state has spent over $2 million to enforce smoking bans in a time of massive state budget shortfalls.

Smoking bans limit options for smokers and profits for those who wish to serve them. A current debate is raging in Brooklyn about whether or not bars should allow parents to bring their babies in. At present, this decision is left up to bar owners and market forces. Hopefully it will not be the next issue taken into the hands of state lawmakers.