Shadow of Kansas hangs over Iowa tax overhaul

Tax cuts there went awry, blowing $280 million budget hole

The dome of the State Capitol building in Des Moines is shown on Tuesday, January 13, 2015. (Adam Wesley/The Gazette)
The dome of the State Capitol building in Des Moines is shown on Tuesday, January 13, 2015. (Adam Wesley/The Gazette)

DES MOINES — Iowa lawmakers soon will debate whether to cut some state income taxes.

That debate likely will include warnings about the rocky road a nearby state has traveled since it, too, cut taxes.

“I would like to work together with Republicans on true tax reform,” said Pam Jochum, the top Democrat on the Iowa Senate tax policy committee. “However, I worry that legislative Republicans are more interested in repeating the failed tax experiment that took place in Kansas.”

Beware Kansas. That is the rallying cry across the country for Democrats who warn against cuts they say go too far.

In 2012, Kansas Republicans reduced income taxes across the board and exempted many business owners from paying. The Kansas plan, spearheaded by Gov. Sam Brownback, was intended to stimulate economic growth and increase wages. But experts said it did neither, and instead left a hole in the state budget of almost $280 million.

So disappointing were the results that the Republican-led Kansas Legislature this year voted to increase some income taxes and restore some of the business taxes. The Legislature even voted by two-thirds majority to overrule Brownback’s veto of the rollback.

Are Iowa Democrats right to sound the Kansas alarm?

While Iowa Republicans have made clear their hope to enact some sort of tax code changes in the legislative session that starts next month, they have not yet released a plan. So there is no way yet to compare it with the Kansas tax cuts.

But experts in Kansas say warnings about their tax cuts are legitimate.

“If a state wants to try this, I would say be ready for this not to work,” said Patrick Miller, a political scientist at Kansas University. “And if it doesn’t work and you end up in the same place Kansas did, you have to think about what do you want to cut.”

THE KANSAS PLAN

Kansas’ tax cuts were significant in two ways:

• It reduced taxes at all levels and eliminated the top bracket.

• It exempted business income for roughly 190,000 businesses.

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Brownback said that the cuts would spur economic growth, that people with more money in their pockets would spend it and business owners with a lighter tax bill would invest in their businesses and workers.

None of the promises came to fruition.

Job growth lags behind neighboring states and gross domestic product growth trails the national average, according to state data. New businesses were not created; instead, many changed classification to take advantage of the new tax exemption, experts said.

The mistake Kansas made, according to one conservative advocacy group, is that it did not also reduce spending.

“Kansas underscores the importance of controlling government spending, which they failed to do badly,” said Drew Klein, Iowa director for Americans for Prosperity. “The economy undoubtedly improved — and revenue did grow — but their inability to control spending is what crushed their budget.”

Experts in Kansas said that’s not the case.

“That’s a lie that’s been promoted by certain groups,” said Ken Kriz, a public affairs professor at Wichita State University.

Spending was cut “substantially” across the board and legislators tried to find ways to be more efficient with state spending, said Miller of Kansas University.

“This argument that Kansas just didn’t cut (spending), it sounds nice but it makes no sense because we did,” Miller said. “ ... Pretty much everything in the budget took a substantial hit.”

A DIFFERENT WAY

Klein said North Carolina may provide a better model. While the state lowered taxes several times over five years, Klein said, it also kept spending growth below the population growth and inflation rates.

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“Not only has their economy boomed, but they’ve experienced several surpluses as well,” Klein said.

North Carolina Republicans since 2011 have cut the state’s personal and corporate income tax rates, eliminated the estate tax and reduced or eliminated other business taxes, according to the Asheville Citizen-Times. Since then, revenue generally has come in ahead of projections. But state economists cast doubt on whether the growth was a direct result of the cuts, the Citizen-Times reported.

WHICH PATH FOR IOWA?

What remains unknown is what type of tax cuts Iowa Republicans will propose. GOP leaders have not yet made public any plans, in part because they are waiting on potential Congressional action on federal tax policy changes.

One key Iowa lawmaker said the Democrats’ warnings of a Kansas repeat are unfounded.

“Frankly, I don’t know what happened in Kansas. I understand they made some pretty dramatic tax cuts and later on ran out of revenue. We’re not going to do that,” said Guy Vander Linden, chairman of the House’s tax committee.

Iowa Republicans have made tax policy changes a top priority since gaining complete lawmaking control after the 2016 elections. Their pitch likely will come during the 2018 session that starts Jan. 8.

Vander Linden said Iowa must act, and cast his own cautionary tale of a neighboring state: Illinois, which after years under Democratic control has lost the most residents in the nation for three consecutive years amid complaints of a state budget mess.

“They can throw Kansas in our way, but they seem to forget about our neighbors to the east,” Vander Linden said.

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