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Democrats say Kansas revenue crash should be a warning

By RUSTY MARKS

The State Journal

CHARLESTON, W.Va. — Democrats in the West Virginia Senate and House of Delegates say recent events in the state of Kansas should serve as a warning to West Virginia lawmakers contemplating eliminating the Mountain State’s income tax.

West Virginia Senate President Mitch Carmichael, R-Jackson, left, and Sen. Mike Romano, D-Harrison, debate tax policy on the floor of the Senate. Carmichael believes eliminating the state income tax would spur economic growth, while Romano fears it would lead to financial disaster.
(Photo by Rusty Marks)

“It’s almost like someone is trying to tell us something,” Delegate Mike Pushkin, D-Kanawha, said on the floor of the House of Delegates on Thursday, June 8. “Cutting income taxes in the middle of a financial crisis is a bad idea.”

Pushkin was referring to an article in Forbes magazine, titled “The Great Kansas Tax Cut Experiment Crashes and Burns.” It was the second time in two days Pushkin held up Kansas as an example of tax reform gone awry, and the second time he pointed to an article in a major news publication as evidence.

Earlier in the week, the Republican-controlled Kansas Legislature voted to overturn a veto by Republican Gov. Sam Brownback and repeal more than four years of tax cuts Brownback first introduced in 2012. Those cuts included slashing Kansas’ income tax rates in a move Brownback promised would spur economic growth.

It didn’t happen. According to Forbes, overall growth and job creation in Kansas performed below the national average and below neighboring states after the cuts were instated, while Kansas’ deficits ballooned.

News of the Kansas tax reform appeal comes just as the West Virginia Legislature is considering a tax and revenue bill that would raise the state sales tax and roll back and possibly eliminate the Mountain State’s personal income tax.

Spurred partly by the theories of supply-side economist Arthur Laffer, Republican leaders in the West Virginia Senate are convinced rolling back or eliminating income taxes in West Virginia would entice people to move to the Mountain State and boost economic growth. The plan has the blessing of Democratic Gov. Jim Justice.

But will economic theory translate to economic fact?

“If we do this and there’s no growth, you’re going to put us on the brink of disaster,” Sen. Mike Romano, D-Harrison, said on the floor of the Senate on Thursday.

Economists and pundits are split on whether or not reducing income tax rates helps economic growth, but there are plenty of people who think it doesn’t.

According to the national Center on Budget and Policy Priorities, a left-of-center public policy organization, “Policymakers in other states should understand that these sorts of tax cuts typically force cuts in funding for investments that people and businesses in states need to thrive, and they can jeopardize a state’s fiscal health.”

Ted Boettner, executive director of the West Virginia Center on Budget & Policy, the state arm of the national group, agrees.

“Similar to Gov. Brownback in Kansas, Gov. Justice and Senate leadership are relying on magic math to push tax cuts for the wealthy at the expense of working families and fiscal conservatism,” Boettner said. “Using ‘dynamic scoring’ or projected economic growth from tax cuts and a road bond that hasn’t been passed is not a sound or common practice.

“States like Kansas that have bet on magic growth from tax cuts have not fared well,” he said. “Lawmakers need to make West Virginia’s fiscal health a priority and pass a tax plan that balances the budget, protects our communities and doesn’t drive more holes into future budgets.”

Support for eliminating income taxes is stronger in the 34-member Senate than in the 100-member House of Delegates.

“The only people who are in love with this (plan) are six or seven senators — Republicans — and the governor,” said Delegate Isaac Sponaugle, D-Pendleton. He said Democrats in both chambers are leery of the idea, as are some House Republicans.

Not all Senate Republicans are convinced eliminating income taxes is a good idea. Senate Finance Committee Chairman Sen. Mike Hall, R-Putnam, said lawmakers might be better off going with more traditional legislation rather than banking on something that might or might not work.

But those in favor of eliminating income taxes remain convinced the idea could help the state, if done correctly.

“Obviously, we’re very cognizant of what’s developed in Kansas, and that’s why throughout this entire process, we’ve taken care to put in what we believe are true safeguards to prevent West Virginia from finding itself in that same boat if the growth and development we expect in the future doesn’t arrive,” said Senate President Mitch Carmichael, R-Jackson, one of the key proponents of the income tax reform plan.

But even those on the more conservative end of the argument say Kansas leaves some lessons in what not to do.

“Kansas is a good example of what not to do from a responsible tax reform perspective,” said Garrett Ballengee, executive director of the conservative Cardinal Institute for West Virginia Policy. “While they had the right idea in many regards — mainly, reducing income taxes and generally relieving the tax burden on individuals and businesses — they also committed a mortal sin.

“Kansas exempted a significant portion of business entities from the income tax — entities known as ‘pass-through’ organizations, e.g., LLCs and sole proprietorships — thereby narrowing the base for taxation. This policy created a huge hole in their budget which was not covered by a reduction in state spending.”

Ballengee said it is important to remember the budget equation has two sides: revenue and spending.

“If a state greatly reduces its tax revenue while leaving government spending comparatively unaddressed, it sets itself up for a fiscal crisis just like the one Kansas is experiencing,” he said. “Good tax reform lowers the rate and broadens the base; unfortunately, with the pass-through exemption, the Kansas reform did not follow the tenets of sound tax reform.

“Kansas violated an extremely important principle of tax reform, and they are paying the fiscal price.”

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