The storyline from tax-relief opponents and media says pass-through employers (partnerships, proprietorships, sub-S corporations and LLCs) haven’t created new jobs with their tax break, so their tax exemption should be repealed. But now we have government data proving that Kansas’ pass-through employers actually created 82 percent of new jobs in 2013 and 2014.
The U.S. Census tracks employment by legal form of organization at the state level since 2010 (2015 data hasn’t been published) and shows a remarkable change in the growth of pass-through employment relative to C-corporation employment since the pass-through exemption went into effect.
Pass-through entities added 36,135 jobs and grew by 8.4 percent compared to C-corporation growth of only 1.4 percent and 7,381 jobs. Some of the pass-through job additions are attributable to C-corporations that converted to pass-through status, but most likely fewer than the number of new proprietors added, which aren’t included in the Census database; their employment data is provided by the Bureau of Labor Statistics, which excludes proprietors and farm workers.
Kansas’ pass-through job growth rate of 8.4 percent is slightly lower than the national average of 9.5 percent. But it is much more competitive than before tax reform, being at 88 percent of the national average (8.4 percent compared to 9.5 percent) versus 52 percent (2.4 percent compared to 4.6 percent). Here’s another perspective: While the national pass-through job growth rate jumped by 107 percent in the two years following passage of tax relief, the Kansas growth rate exploded by 250 percent.
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Kansas is extraordinarily dependent upon jobs created by new establishments, many of which are small businesses. In fact, if not for jobs created by new establishments (which could be a proprietor opening a new restaurant or WalMart opening a new location), Kansas would only have had two years of private sector job growth since 1977.
State and local government should be rolling out the red carpet for new businesses – not finding ways to tax and regulate them to death.
There remains a legitimate fairness issue with exempting pass-through income of certain employers, but removing that exemption would have a significant negative impact on jobs. How is that fair to the people who will lose their jobs?
If fairness is the issue, how is it fair to tax private citizens on their pensions and 401(k) but exempt Kansas Board of Regents employees from state income tax on their retirement pay? Or exempting state employees from paying tax on most of their pension income? Or giving extra special pension deals to legislators? Or doling out taxpayer subsidies and favors to individual companies? Or charging commercial real estate owners 2.2 times the effective property tax rate as homeowners? Where is the outrage over those fairness issues?
The state budget can be balanced without any tax increases if legislators are willing to make government operate a little more efficiently. That would be the fair thing to do.
Dave Trabert of Overland Park is president of the Kansas Policy Institute.