In this episode of WichitaLiberty.TV: Dave Trabert of Kansas Policy Institute joins Bob and Karl to discuss his new book What Was Really the Matter with the Kansas Tax Plan –- The Undoing of a Good Idea. View below, or click here to view at YouTube. Episode 186, broadcast March 3, 2018.
What Was Really the Matter with the Kansas Tax Plan
New Book Outlines Tax Lessons from Kansas “Experiment”
Tax relief opponents have repeatedly pointed to the 2012 Kansas tax plan as their primary example of why tax cuts do not work. But, other states like North Carolina, Indiana, and Tennessee contemporaneously, and successfully, cut taxes. What was different about the Kansas experience?
The answer to that question is multi-dimensional according to a new book from Kansas Policy Institute, entitled What Was Really the Matter with the Kansas Tax Plan — The Undoing of a Good Idea. The book covers the six years between the conception of Brownback’s tax cuts in 2011, the tax package being signed into law in 2012 and later repealed with the largest tax hike in state history in 2017. It documents the many mistakes that occurred, a toxic political undercurrent, and several unrelated economic circumstances that negatively impacted the budget and multiple misconceptions along the way.
Author and KPI president Dave Trabert says, “Much of what went wrong was avoidable. We hope citizens and legislators across the nation can learn from the mistakes made in Kansas as they strive to create the best path forward for everyone to achieve prosperity with lower taxes.”
The final chapter of the book is “Lessons Learned” and includes these big lessons:
Don’t cut revenue and increase spending.
Explain why tax relief is necessary (i.e., what are the consequences of not reducing the tax burden).
Develop a comprehensive plan to balance the budget on less tax revenue, with room for the unpredictable but inevitable misfortunes (like plummeting oil and farm commodity prices).
Have the right systems in place, including performance-based budgeting and a reliable revenue estimating process.
To ensure that lawmakers have this information as they work in statehouses around the country, nearly 8,000 complimentary copies are being distributed to every state legislator across the country in partnership with The Heartland Institute.
Danedri Herbert, an experienced journalist currently writing for the online publication “The Sentinel,” co-authored the book and former U.S. Senator Tom Coburn of Oklahoma wrote the Foreword. Coburn writes, “This is a very important book, not only for state and national legislators who try to represent citizens instead of special interests, but also for taxing and spending watchdogs in the press and those involved with good government citizen activist groups.”
What Was Really the Matter with the Kansas Tax Plan is published by Jameson Books, Inc. and copies will be available on Amazon.
Trabert concludes, “Kansas could have successfully cut taxes as other states have done. The undoing of a very good idea—allowing citizens to keep more of their hard-earned money—gets to the crux of the serious state and national challenges we face: policy takes a back seat to politics. The efforts of many elected officials are not on solving problems in ways that create the best path forward for all Americans to achieve prosperity, but on maintaining and consolidating power.”
In this episode of WichitaLiberty.TV: Radio Host Andy Hooser of the Voice of Reason appears with Bob Weeks to discuss issues in state and national political affairs. View below, or click here to view at YouTube. Episode 177, broadcast December 23, 2017.
Printable tables of voting on legislation that raised taxes in Kansas.
The legislation that implemented tax increases in Kansas in 2017 is SB 30, titled “Concerning taxation; income tax, determination of Kansas adjusted gross income, modifications, rates, itemized deductions and credits; sales and compensating use tax, collection and distribution thereof, STAR bonds.” 1
Important action on this bill took place on June 5 and 6. On the first day, each legislative chamber passed a conference committee report. That’s a version of the bill that’s produced by a committee of three members of each chamber. It resolves differences between the bills passed by each chamber. The report is then sent to each chamber for a vote where no amendments are allowed. This report passed both chambers and was sent to the governor.
The governor vetoed the bill, so each chamber then had a chance to override the governor’s veto with a vote of two-thirds of its members. The override was successful, and SB 30 became law.
For the first vote in the House, which passed with a fairly narrow margin of six votes over what is required, a number of Democrats voted Nay, presumably because they thought the tax increase was not large enough. On the vote to override, all Democrats except one voted in favor of higher taxes, and quite a few Republicans switched their votes from opposition to higher taxes to voting in favor of higher taxes.
In the Senate the vote was more consistent. The first vote passed with 26 votes. The second vote, which required 27 votes to be successful, achieved exactly that number, as one Republican senator switched to vote in favor of higher taxes.
In the downloadable and printable pdf tables, notable votes are indicated. For vote 2, the override vote which passed the bill into law, Republican votes are indicated. Additionally, those members who changed their support of higher taxes from vote 1 to vote 2 are indicated. For House of Representatives votes, click here. For an abridged version that prints on one page, click here.
To find who represents you in the Kansas Legislature and other offices, use Kansas Voter View, specifically this form.
Of note, the two votes mentioned above are not the only votes on SB 30. The bill started its legislative journey as a bill titled “An act concerning sales taxation; relating to the Kansas retailers’ sales tax act.” Later all language in the bill was deleted and an entirely new bill was created, although it retained the designation SB 30. Votes taken before that time are not relevant to the final purpose of the bill.
Kansas Governor Sam Brownback may exercise a line item veto over any item in the just-passed budget and school spending bills. Here are a few ideas that deserve the veto.
A small matter: In his recommended budget, Kansas Governor Sam Brownback recommended moving the Kansas Securities Commissioner to the Insurance Department. That happened. But his recommendation to move the Board of barbering to the Board of Cosmetology was not followed. As a result, $186,384 must be added to spending for FY 2018. This is all funds spending, not general funds. There is a deletion of spending from the Board of Cosmetology that partially offsets this spending, but it is a lost opportunity to save. 12
A large matter: The efficiency study commissioned by the legislature recommended savings in the method of acquiring health insurance for public school employees. This was not adopted. Therefore, $47,200,000 in general fund spending is added over what the governor recommended. 34
This is the type of spending that needs to be vetoed. Except: There is no line in a bill that designates this spending. Instead, this “spending” in the form of savings not realized. The governor should veto SB 19, the school funding bill, in part or in whole. Such a veto, along with a likely override, would send a message to Kansas taxpayers that the legislature chose to spend this money instead of pursuing needed efficiency.
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Notes
“For FY 2018 and FY 2019, the Governor recommends certain consolidations that include moving the Securities Commissioner to the Insurance Department and moving the Board of Barbering to the Board of Cosmetology. The Governor estimates that combining the agencies will create efficiencies and save money over the long-term.” The Governor’s Budget Report for Fiscal 2018, Vol. 1. p. 77 ↩
Conference Committee Report for HB 2002, Sec. 12 (a) ↩
“The FY 2018 budget assumes savings of $47.2 million from implementation of Alvarez & Marsal efficiency recommendations to include K-12 health benefit consolidation and sourcing select benefit categories on a statewide basis.” Budget Report, p. 17 ↩
“Add $47.2 million, all from the State General Fund, for removing savings associated with A&M recommendations for health insurance and procurement for FY 2018.” Bill Explanation For 2017 Senate Sub. For House Bill 2002, p. 10. ↩
A politician’s boasting should not be the yardstick for policy.
As noted by Ed Flentje in the Wichita Eagle:
As a newly elected governor in 2011 Brownback embraced the discredited, tax-cut dogma of Arthur Laffer in the belief that tax cuts would dramatically stimulate economic growth. He told a friendly audience that cutting income tax rates would generate even more revenue for government. Soon after, the governor elevated the bluster. His tax cuts would give “a shot of adrenaline in the heart of the Kansas economy.” “We’ll have a real live experiment.” “Look out Texas. Here comes Kansas!” “Glide path to zero.”
Despite Professor Flentje’s claim, there is much evidence that higher taxes, especially higher income taxes, mean lower economic growth. 123 (There’s also the side benefit of leaving more money in the hands of those who earned it, rather than transferring it to the wasteful public sector.) Cutting taxes — or raising taxes, for that matter — is a treatment that influences things in one direction. If other more powerful forces influence things in an opposite direction, it doesn’t mean the original treatment didn’t work.
In the case of Kansas, think how much worse things might be if not for the stimulative effect of the tax cuts.
Still, Governor Brownback should have been more measured in his remarks — or his bluster. He shouldn’t have followed the example of President Barack Obama. He, right after becoming president, promised that the unemployment rate would not top eight percent if his stimulus bill was passed. That plan passed.
In January 2009 two Obama administration officials, including Christina Romer (who would become chair of the Council of Economic Advisers) wrote a paper estimating what the national unemployment rate would be with, and without, the American Recovery and Reinvestment Plan, commonly known as the stimulus. The Romer paper included a graph of projected unemployment rates. The nearby chart from e21 took the Romer chart and added actual unemployment rates. (The accompanying article is Revisiting unemployment projections. That chart and article were created in 2011. I’ve updated the chart to show the actual unemployment rate since then, as black dots. The data shows that the actual unemployment rate was above the Obama administration projections — with or without the stimulus plan — for the entire period of projections.
The purpose of this is not to defend Brownback by showing how Obama is even worse. (Disclosure: Although I am a Republican, I didn’t vote for Brownback for governor.) Instead, we ought to take away two lessons: First, let’s learn to place an appropriately low value on the promises, boasts, and bluster made by politicians. Then, let’s recognize the weak power government has to manage the economy for positive effect. Indeed, the lesson of the Obama stimulus is that it made the unemployment rate worse than if there had been no stimulus — at least according to the administration projections.
Governor Brownback was right to cut taxes because Kansas taxes were too high.
“So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.” McBride, William. What Is the Evidence on Taxes and Growth? Tax Foundation. Available at https://taxfoundation.org/what-evidence-taxes-and-growth/. ↩
“Research finds that higher state taxes are generally associated with lower economic performance. There is somewhat weaker evidence that state and local taxes can significantly reduce income growth within a state, particularly when the revenues raised are devoted to transfer payments. More recent research corroborates this finding in relation to net investment and employment. However, when additional tax revenue is used to improve the quality of public goods and services, economic growth may increase. When looking at business activity more broadly, more comprehensive reviews of the literature find higher taxes to be associated with less economic growth. They also find this relationship to be stronger within metropolitan areas than across metropolitan areas, which means that local taxes have a larger effect on economic growth when it is less costly for firms and taxpayers to relocate to avoid the tax.” Mercatus Center. Economic Perspectives: State and Local Tax Policy. Available at https://www.mercatus.org/publication/economic-perspectives-state-and-local-tax-policy. ↩
“Two research papers illustrate the need to maintain low taxes in Kansas, finding that high taxes are associated with reduced income and low economic growth.” Weeks, Bob. Kansas needs low taxes. Available at https://wichitaliberty.org/kansas-government/kansas-needs-low-taxes/. ↩
Kansas governments are trying — again — to expand their powers to take property to the detriment of one of the fundamental rights of citizens: private property rights.
Empty lots in northeast Wichita. Click for larger version.Last year cities in Kansas lobbied for a bill that would expand their powers to take property from its lawful owners, all in the name of saving neighborhoods from “blight.” Governor Brownback vetoed that bill, explaining, “The right to private property serves as a central pillar of the American constitutional tradition.”1
The governor further explained: “The broad definition of blighted or abandoned property would grant a nearly unrestrained power to municipalities to craft zoning laws and codes that could unjustly deprive citizens of their property rights. The process of granting private organizations the ability to petition the courts for temporary and then permanent ownership of the property of another is rife with potential problems.”
The bill introduced this year is SB 31, titled “Rehabilitation of abandoned property by cities.”2 It is a slightly modified version of SB 338, the bill from last year.It deserves opposition for the same multitude of reasons. Last year John Todd summarized the reasons for opposition:
Senate Bill 338 appears to provide local governmental units with additional tools that they don’t need to “take” properties in a manner that circumvents the eminent domain statutes that private property rights advocates fought so hard to achieve in 2006.
The total lack of compensation to the property owner for the deprivation or taking of his or her property is missing in the bill.
Allowing a city or their third party take possession of vacant property they do not own and have not obtained legal title to is wrong.
Please take a look at a comparison between a free-market private sector solution as contrasted to a government mandated program to achieving affordable housing and the impact highly subsidized government housing solutions are having on adjacent home owners.
This year’s bill is a “committee bill,” meaning that no legislator was willing to be a named sponsor. We might call this the “Longwell-Meitzner bill,” as these two Wichita City Council members were particularly disappointed that the governor of Kansas blocked their power grab.3
Of note, Todd and I, along with others, had a luncheon meeting with a Kansas Senator who voted for last year’s bill. When we told him of our opposition, he asked questions like, “Well, don’t you want to fight blight? What will cities do to fight blight without this bill?” When we listed and explained the many tools cities already have, he said that he hadn’t been told of these. This is evidence that this bill is not needed. It’s also evidence of the ways cities try to increase their powers at the expense of the rights of people.
Following, John Todd’s testimony opposing SB 31. His exhibits are available via a link at the end of the testimony.4
January 26, 2017
Senator Elaine Bowers, Chair
Senate Ethics, Elections and Local Government
Subject: MY OPPOSITION to Senate Bill No. 31 scheduled for a public hearing in the Senate Ethics, Elections, and Local Government Committee on January 26, 2017
Dear Senator Bowers and members of the Senate Ethics, Elections, and Local Government Committee,
I OPPOSE the passage of Senate Bill No. 31 of 2017 since it is basically a slightly modified and expanded version of the Senate Bill No. 338 of 2016 that Governor Sam Brownback correctly vetoed. I see no new provisions in the 2017 bill that gives citizens any additional private property protection; rather, it strengthens local authorities “unmitigated power in determining which properties should be seized, allowing localities to write their own rules. It also cedes to municipalities the power to select which private organizations receive control of the property.”
This quote is from an e-mail the Governor’s office issued in announcing his Veto of the 2016 bill (see copy attached). A “Message from the Governor” dated April 11, 2016 provides his excellent reasoning for the Veto, explaining, “The right to private property serves as a central pillar of the American constitutional tradition (see copy attached).
Shortly after starting my career in the real estate business in 1976 I acquired my first rehab house. It was located in the Old Orchard area of Wichita that everyone considered one of the most economically challenged and difficult neighborhoods to work with in town. I paid the seller nearly $20 thousand her dilapidated house that included three vacant single family building lots. It cost me in the range of $10 thousand to rehabilitate the house that included repairing a caved in concrete block basement wall. I sold the rehabilitated house and the lot it was on for the $30 thousand I had invested in the transaction and wound up with the vacant lots free and clear. I sold the three lots to a builder for $9 thousand cash and he subsequently built three new affordable entry level homes on them.
Now let’s take a look at this private sector transaction:
The seller of the house received cash for her property through a mutually agreed upon transaction without coercion (no eminent domain) involved.
I rehabilitated the house and sold it to a young couple for their first home.
The builder who purchased the 3 vacant lots built three new houses that he sold to owner occupant homeowners.
The builder provided construction jobs and purchased building materials from local vendors.
The Orchard neighborhood saw immediate improvement and felt the benefits of economic uplift.
The City, County, and School District tax base was expanded providing with one rehabilitated and three new houses thus providing additional tax revenue to fund fire, police, public safety, and money to educate our children.
I paid Federal and state taxes on the profit I made in the transaction and I suspect the builder did too.
There was no need for government subsidies of any nature for this private sector transaction to work.
Now in contrast, let’s take a look at how our local government has been handling similar neighborhood opportunities. Please take a look at the attached Building Blocks Infill Project Area map to discover what has been happening in a predominantly African American neighborhood community in Wichita.
The vacant green rectangles are dozens of vacant lots where houses once stood that were bulldozed by the city.
The owners of these houses were paid $0 for the houses that were taken by the city’s bulldozer
In my judgment, many if not a majority of these bulldozed houses had economic value and offered the potential for rehabilitation and the creation of low-cost entry level housing. (See exhibit A)
The city charged the property owner $8 – $10 thousand for bulldozing charges leaving the owner with a vacant lot that was left to produce high weeds and collect trash.
Most of the owners let their vacant lots go back for taxes and many were sold for $100 or less and they received $0 for their properties.
Thus the existing and potential tax base was lost as well as the wonderful opportunity for clean low-cost affordable entry level home ownership that is part of the American dream.
Some of the most vulnerable and economically challenged property owners of our city rightly feel helpless in the face of this devastation.
Now local governmental officials are asking you for additional powers through Senate Bill No. 31 to “deal” with this problem.
They want the power to seize unoccupied houses without compensating the owners anything for their property.
They want to empower non-profit (non-taxpaying) organizations of their choice to seize unoccupied houses without compensating the owners for their property.
The non-profits involved in the redevelopment of this neighborhood community with the exception of Habitat for Humanity rely heavily on tax subsidies for wealthy taxpayers and generous Federal subsidies in the range of $50 thousand for each house built and sold.
I hear talk of Tax Increment Financing (TIF) to finance redevelopment in this community. The TIF program is simply a diversion of tax revenue that needs to go to city, county, and school district treasuries and not flow back to developers.
I see nothing in Senate Bill No. 31 that does anything to promote private sector redevelopment.
Is there a private sector solution? I say YES and I see it happening. Private sector investors, contractors and homeowners are stepping up and seizing opportunity (See Exhibit B). This economic uplift is healthy for the neighborhood community, expands the tax base, and offers an opportunity for investor/contractor profit in some cases or low-cost affordable home homeownership in others.
The rehabilitation of existing houses and redevelopment on vacant “infill” is best achieved by the private sector and not by government planners or their favored non-profit entitles.
The taking of property by local government without compensation is wrong. I believe that was what Governor Brownback was saying in his veto message, “Government should defend and protect the property rights of all citizens, ensuring that the less advantaged are not denied the liberty to which ever other citizen is entitled.”
I urge you to OPPOSE passage of Senate Bill No. 31!
Sincerely,
John R. Todd
A Kansas Citizen
The exhibits referred to are available in pdf form. Click here.
Proposals in the Kansas budget for fiscal year 2018 are more evidence of why defined-benefit pension plans are incompatible with the public sector.
Kansas Governor Sam Brownback has proposed delays in funding KPERS, the Kansas Public Employees Retirement System. The delays are in both directions. The state intends to break a past promise to pay, and also to skip some future payments.
A memo from KPERS summarizes recent history and the proposed changes: “Last fiscal year, the State delayed its fourth quarter payment for School employer contributions with a promise to pay it in Fiscal Year 2018 with interest. The Governor is recommending the State not pay this contribution and skip one quarterly payment each year through FY19. In addition, the Governor recommends extending the time to pay down KPERS’ existing unfunded actuarial liability by 10 years.”1
Many will criticize the proposed reduction in funding KPERS as stealing from KPERS. That really isn’t true. KPERS has plenty of money to pay current retirees their promised benefits. The above memo also says that those near retirement won’t be affected.
But what about younger employees who may not retire for 20 or 30 years? Will they receive their promised benefits?
The answer is yes, almost certainly. Their retirement benefits are in the form of a contract, and it is very unlikely that the state will break those contracts.
So: Is KPERS being robbed? Stolen from?
No. It’s future Kansas taxpayers who will be mugged. They will have to pay the unfunded liabilities accumulated by not only the current governor and legislature, but by past governors and legislatures too. I explain in more detail in my recent article No one is stealing* from KPERS. (The asterisk notes that there is stealing in a way, but from future taxpayers.)
Further: It is entirely foreseeable that this is happening. In 2015 the state issued $1 billion in bonds to address a portion of the KPERS unfunded liability. This made the unfunded liability ratio look better, and the governor and Republicans continually boast of this. But debt has simply been shifted from one balance sheet to another. The same taxpayers will eventually pay.
This is one of the reasons why government should not offer defined-benefit pension plans. Because of the long time horizons involved, it’s easy to delay and postpone dealing with problems. Or, legislators are prone to make risky investment decisions as Kansas did in 2015 by $1 billion in bonds and transferring the proceeds to KPERS. This was — is — a risky maneuver, and it has led to undesirable behavior that was entirely predictable.
The plan was that the state would borrow $1 billion, and invest it. If the state earned more in investment returns than the interest cost on the bonds, the state wins. Barry Poulson, Ph.D., Emeritus Professor at the University of Colorado — Boulder has written on the danger of borrowing to shore up state pension funds, as Kansas has done. He explained there is the “lack of nexus between the investment of the bond proceeds and payments for unfunded liabilities in the plan.” This means that the borrowed funds may be used for current spending rather than for correcting the KPERS unfunded liability.2
Paulson explains: “If legislators see that additional funds are available to pay off unfunded liabilities in the pension plan they may choose to allocate less general fund money to meet these pension obligations.” What Poulson warned of happened in Kansas in 2016. Now, the governor proposes even more: Pushing off KPERS contributions to the future so that more money is available for spending on other stuff now.
In a way, it’s surprising that groups who advocate for public employees are upset with this. (See, for example, here from KNEA.) Instead, they should be grateful. KPERS benefits are unlikely to be cut for any retirees. But underfunding KPERS today means there is more money available for public employees and the agencies that employ them. In reality, these groups simply want higher taxes now.
There are useful lessons we can learn from the criticism of Kansas Governor Sam Brownback, including how easy it is to ignore inconvenient lessons of history.
Tax cuts in Kansas were promised by Governor Brownback to be a “shot in the arm” for the Kansas economy. Opponents of the governor and tax cuts take great delight in reporting the generally anemic growth of the Kansas economy since then. Month after month, the tax cuts are condemned by Kansas newspaper editorial writers and the governor’s detractors.
I don’t think it’s a particularly strong form of argument to defend someone by showing how someone else is equally as bad — or worse. Similarly, criticizing someone for their fixation on A while they ignore the equally bad B: We need to know why they ignore B. Have they forgotten B? Do they not have time to write about B? Or do they ignore B because the fact of B is inconvenient to their ideology or their criticism of A? But I see that not everyone shares these ideals, and even so, perhaps we can learn something.
Many people remember that President Barack Obama warned that the unemployment rate would rise to a high level without a stimulus program. I can’t find that he mentioned a specific number that the unemployment rate would rise above. But in January 2009 two Obama administration officials, including Christina Romer (who would become chair of the Council of Economic Advisers) wrote a paper estimating what the national unemployment rate would be with, and without, the American Recovery and Reinvestment Plan, commonly known as the stimulus.1 That plan passed.
The Romer paper included a graph of projected unemployment rates. The nearby chart from e21 took the Romer chart and added
actual unemployment rates. (The accompanying article is Revisiting unemployment projections. That chart and article were created in 2011. I’ve updated the chart to show the actual unemployment rate since then, as black dots. The data shows that the actual unemployment rate was above the Obama administration projections — with or without the stimulus plan — for the entire period of projections.
The purpose of this is not to defend Brownback by showing how Obama is even worse. (Disclosure: Although I am a Republican, I didn’t vote for Brownback for governor.) Instead, we ought to take away two lessons: First, let’s learn to place an appropriately low value on the promises and boasts made by politicians.
Then, let’s recognize the weak power government has to manage the economy for positive effect. Indeed, the lesson of the Obama stimulus is that it made the unemployment rate worse than if there had been no stimulus — at least according to the administration projections.
And, there is one more lesson to learn about our state’s newspaper reporters and editorial writers, but I think you’ve discovered that already.
The answer to that question is multi-dimensional according to a new book from Kansas Policy Institute, entitled What Was Really the Matter with the Kansas Tax Plan — The Undoing of a Good Idea. The book covers the six years between the conception of Brownback’s tax cuts in 2011, the tax package being signed into law in 2012 and later repealed with the largest tax hike in state history in 2017. It documents the many mistakes that occurred, a toxic political undercurrent, and several unrelated economic circumstances that negatively impacted the budget and multiple misconceptions along the way.
