In 2012, Kansas adopted a tax plan that shifted the state’s tax load to hardworking families and cut taxes for the rich and businesses, leaving the state with a $700 million budget hole. The plan and debate in developing it was heavily influenced by flawed economic theories that claim tax cuts will generate economic growth. The loss in revenue was supposed to be made up for in increased growth made possible through tax cuts.
As we have written elsewhere the reality has been far different from this promise. And the likelihood that any other outcome could have occurred belies the best evidence: tax cuts harm economic growth. But more than just the impact of this proposal, there are lessons to be learned from how that plan came to pass.
Governor Brownback started out with a revenue neutral bill which cut the personal income tax, provided a deduction on pass through business income, eliminated itemized deductions and credits, like the EITC, and maintained an increase in the sales tax rate. The House and Senate then put forward their own plans which while similar in theme to the Governor’s plan lacked many of the base-broadening measures as well as the ability to raise the same level of revenue as under then current law. Under the compromise plan, passed by the legislature and signed into law by the Governor, rate cuts and exemption for business income were adopted but without any base broadening or revenue raising elsewhere to make up for the cut. The result was legislation that didn’t add up.
Even more concerning is that the 2013 developments in Kansas suggest that the Governor will continue to push for even greater reductions in income taxes. His stated goal is the eventual elimination of the income tax altogether.
As we anticipate Governor McCrory’s proposal on taxes, the process in Kansas should make us wary as well as the potential for there to be stated and unstated goals. Can reform measures survive the legislative process? Will the changes made during that process impact the ability of the state to make critical investments this year and in the future? Who will ultimately benefit from tax changes?
North Carolina already got a head start on Kansas’s flawed plan by exempting the first $50,000 in “pass-through” business income in 2011. Our analysis finds that this move benefits higher income taxpayers and is likely to have a far greater fiscal impact on our state budget. And proposals to eliminate the personal and corporate income tax already floating in the North Carolina legislature will, like in Kansas, shift the tax load to middle- and low-income North Carolinians.
The tax policy debate in North Carolina is already shaping up to be a negotiation between bad and worse proposals that don’t look at all like reform. They borrow from states whose tax cuts are delivering worse-not better- outcomes. As Kansas found out last year, the impacts are immediate and far-reaching.