This continues to be a stagnant U-shaped versus V-shaped recession which rebounds after reaching rock bottom.
What causes an economy to rebound? It is a cascading effect that occurs when businesses regain optimism and start rehiring, people get back to work and consumer confidence improves. We’re not there. Businesses are more apprehensive than optimistic.
Advocates of Keynesian economics believe if the government can take enough money out of the private sector through fees, taxes and borrowing and spend the money for us, it can stimulate the economy to grow. Yet, every dollar government spends first is taken out of the economy or borrowed to be paid back with interest.
Rather than increasing capital, it redistributes it. Rather than many individuals deciding how money is best used — saved, spent, given to nonprofits, invested — it transfers decision making to a few in government; and there’s nothing about redistribution that makes businesses optimistic.
In Kansas, we have to close the gap between spending and revenue. The governor has proposed a three-year sales tax increase from 5.3 to 6.3 cents per dollar or an 18.87 percent increase — not a one percent increase, as some describe it. Before you ask, here’s the math: Percent of increase is calculated by taking the difference (.063 - .053 = .01) and dividing it by the original amount (.01/.053 = .1887 or 18.87 percent).
He has also proposed a 55-cent tax increase on cigarettes.
The Department of Labor has increased unemployment taxes and has a plan to borrow another $700 million from the federal government with businesses required to pay back the interest through even higher unemployment taxes.
The Department of Revenue would like to increase taxes on utility bills. See why the private sector isn’t optimistic?
According to the Legislative Research Department, in the last two years Kansas lost 157,400 private sector jobs and added 7500 government jobs, mostly in education and local government.
The public sector is not an economic driver; it is funded by economic drivers. If a household has $20,000 and distributes some to its members and they give back a portion to the household, they have not grown the $20,000. Capital was not added; it was redistributed. Economic growth must come from an outside source, i.e. the private sector.
As far as tax increases: Sales taxes are the most regressive. As a percentage of income, they hit lower incomes hardest. If tax increases pass — and the votes may be there, without mine, I might add — there is no guarantee we’ll realize the much-needed revenue. Using a tax-analysis model factoring in ripple effects of tax increases, Dr. Art Hall from KU’s Center for Applied Economics foresees them depressing Kansas private employment (jobs) and holding down personal income growth.
With cigarette taxes, revenue just goes over the line to Missouri, for example. Not only buyers, but some businesses on the Kansas borders have begun the inevitable exodus.
California, New York and New Jersey are examples of what happens to budgets when states try to increase revenue through higher taxes. They reduce the amount of revenue collected, because producers adapt.
Recently, New Jersey voters rejected that state’s tax-and-spend approach, electing a governor whose goal is: “To reduce and reform New Jersey’s habit of excessive government spending, to reduce taxes, to encourage job creation, to shrink our bloated government and to fund our responsibilities on a pay-as-you-go basis.” It will be interesting to watch New Jersey’s revenue collection over the next few years.
This is the genius of Federalism (states retaining autonomy) over Statism (the federal government growing beyond its constitutional role). Federalism gives us 50 separate case studies on what works and what doesn’t.
The Kansas tax committee is revisiting tax exemptions. Some should go, but eliminating all exemptions — which is unrealistic — would save (on paper, not real life) $500 million. The $4 billion number some have used assumes an elimination of the “ingredient” or “component-part” exemption which would instead add a new tax on every chain in the sales process link — from pasture to cow to steak. It is easier to say “cut exemptions” than it is to do, i.e. non-profits, historic preservation, adoptions, alternative fuel, franchise phase out, education savings, agriculture loan privilege tax credit, etc.
Another way to raise revenue is to expand the tax base. A bill to attract new businesses to Kansas passed the House. PEAK (Promoting Employment Across Kansas) offers temporary incentives once a new business is employing workers. The tax break lasts five years.
Despite a misunderstanding by some, PEAK is not for existing work; it does not constitute a loss of revenue. It incents new jobs and new revenue. We have been losing businesses to other states and PEAK seeks to offset some of that loss.
Aviation has accounted for more than 20 percent of revenue to the State General Fund. Now there’s pressure for aviation companies to set up shop elsewhere. What tax increase advocates fail to factor is that any percent of zero is still zero.
PEAK is a win-win for new businesses, for people who need jobs, for the State General Fund and for agencies which depend on a robust SGF.
Not surprisingly, some legislators promoting tax increases aren’t willing to vote yes without cover. As a colleague was told when she asked a tax increase proponent from across the aisle: “So you’re going to vote for a tax increase?” “No,” he said. “We’re going to make you guys do it.”
In contrast, I have respect for a legislator from the other side of the aisle who told me he let his constituents know he would be voting to raise taxes. On principle, I cannot vote that way, but I consider his transparency principled, as well.
Marc Rhoades represents District 72 in the Kansas House of Representatives.
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