Economist Arthur Laffer says tax cuts will help Kansas grow

08/14/2012 5:00 AM

08/14/2012 8:45 PM

Gov. Sam Brownback and his celebrity tax policy consultant, Arthur Laffer, said Tuesday that the income tax cuts Kansas lawmakers approved earlier this year will drive growth and make Kansas more competitive with surrounding states.

Laffer told more than 200 people at a small-business forum at Johnson County Community College that there is a war among states over tax policy and that nowhere is that revolution more powerful than in Kansas. He said Kansas’ tax cuts and political shifts will produce “enormous prosperity” for the state.

“It’s not a left-wing, right-wing thing,” Laffer said. “It’s economics.”

Laffer said his studies show states with lower tax rates outperform high-tax states — a notion several other tax policy analysts say is misleading. Laffer said lower taxes may not work every day of every week, but he said economic growth is consistently driven by low-tax, low-regulation policies.

He said it’s like smoking cigarettes — some people smoke everyday and die at age 97 without a trace of cancer. “But if you want good health I wouldn’t suggest you go out and start smoking,” he said.

In a new paper handed out at the forum, Laffer and Stephen Moore, an economist who founded the Club for Growth, which advocates for low taxes and deregulation, dispute studies that say tax cuts don’t produce the economic activity politicians promise and they argue that lower taxes drive growth.

“Taxing rich people and giving the money to poor people will increase the number of poor people and reduce the number of rich people,” Laffer and Moore wrote.

In a brief interview, Laffer said he hasn’t produced a model to project when Kansas will notice meaningful economic growth as a result of the tax cuts.

“These are long-term things,” he said. “It’ll make a big difference in a decade.”

Secretary of Revenue Nick Jordan said he thinks Kansas will see noticeable growth within three years, and he said the state will monitor job and population growth to gauge the tax cuts’ success.

Brownback wouldn’t give any exact time frame.

“It takes some time, there’s no question about it,” he said. But he said he expects some businesses will anticipate the cuts and may move into the state.

Flaw in the plan

Brownback and other top state officials also said they hope the Legislature will quickly fix a section of the new tax-cut bill that goes into effect just before lawmakers convene in Topeka in January.

The bill eliminates nonwage income taxes for about 191,000 businesses across the state. But many small-business owners who take profits out of their business will now see those profits taxed as a capital gain.

When business owners invest in their business, the tax world considers that the basis. When the business owner profits and pays themselves back for that initial investment, it isn’t taxed. Business owners can increase their basis when they invest more money.

But under the new bill, the basis is frozen. Business owners can only decrease their basis. And since many small-business owners have no basis, the profits they take out will be taxed as a capital gain, according to Gary Allerheiligen, a Wichita accountant who was on the panel with Brownback discussing tax policy.

“That was not the intent of the Legislature,” said Allerheiligen who consulted with Brownback about tax policy during the session earlier this year.

Asked whether the Legislature would act quickly, Brownback said he couldn’t provide a reliable answer.

“My sense would be that would be something people would try to clear through early,” he said.

Brownback declined to characterize how big of a deal the flaw is.

But he told business leaders that he’s confident lower taxes and smaller government will produce economic growth. And Laffer said that the argument is simple: people and businesses seek out lower tax rates, and higher rates discourage people from employment.

“If you tax people who work and you pay people who don’t work, do I need to say the next sentence to you?” he asked.

Details of the plan

Laffer is one of the nation’s most well-known economists, primarily because he created and promoted supply-side economics for President Reagan. He has spent decades advocating tax cuts as a way to create private sector prosperity. Government revenue lost to the tax cuts will be replaced with increased revenue generated by private sector growth, he said.

Brownback gave Laffer a $75,000 contract to consult with the state on tax reform efforts earlier this year, and Laffer tried to rally support for a massive tax-cutting plan at legislative hearings during the legislative session. The plan called for reduction of individual income taxes, the phasing out of income taxes on businesses and the elimination of more than a dozen tax credits and deductions, including several popular ones such as the home mortgage deduction and the earned income tax credit that benefits the working poor.

That plan failed to generate support in the House and Senate. But it was advanced to the Senate where it was drastically altered, driving up the cost of the plan. Then when the House heard the Senate wouldn’t consider a separate negotiated plan, it advanced the bill to Brownback, who signed it.

Starting in January, the plan will reduce individual income tax rates and eliminate income taxes for owners of about 191,000 businesses. The new law collapses state income taxes to two brackets and cuts individual rates to 3 percent for married people who file jointly with income of less than $30,000. Income beyond that will be taxed at 4.9 percent.

Conservatives, including Brownback, project it will drive private sector growth and create thousands of new jobs. Other Republicans and Democrats believe it will force the state to drastically cut important core services, including education and aid for the poor and disabled.

Legislative researchers project it will create a cumulative shortfall of more than $2.5 billion over five years.

A study by the Institute on Taxation and Economic Policy that Laffer disputes calls Laffer’s studies showing that low-tax states outperform others “misleading.”

Their study says residents in “high rate” income tax states have as good or better economic growth per capita over the past decade than those in no-income-tax states.

“There is no reason for states to expect that reducing or repealing their income taxes will improve the performance of their economies,” the study concludes.

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