The Downside of Cutting Taxes at All Costs
A new tax plan from leaders in the Kansas House of Representatives is a prime example of how a misguided focus on cutting taxes at all costs can lead to bad fiscal policy that threatens to weaken a state’s economy.
The proposal would:
- Cut income taxes virtually every year, and eventually repeal the individual and corporate income tax. The bill would require the state to cut income tax rates every year in which nominal revenue growth exceeded 2 percent, which is less than the current rate of inflation, until the individual and corporate income tax disappeared completely. Income taxes make up over half of Kansas’ general fund, which supports such investments as education, public safety, and health care — key ingredients for economic growth and high-quality jobs over the long term. Already, transportation officials warn that they will have to delay or cancel highway projects to help pay for the proposed tax cuts.
- Raise taxes on nearly 200,000 low-income working families with children by cutting the Earned Income Tax Credit in half. Halving the state EITC would leave low-income families with less money to spend in the local economy and dramatically weaken the credit’s antipoverty impact.
- Grant a huge, unprecedented tax break to corporations and their owners. The bill would abolish the income tax on business income that is “passed through” to owners, rather than taxed at the corporate level. Though proponents present the change as a job creator, much of the benefit would flow to large corporations and to investment funds and other entities that have few or no employees and are unlikely to create jobs, as our analysis explains.
- Threaten the state’s bond rating and make infrastructure improvements more costly. The bond rating agency Moody’s recently declined to upgrade Oklahoma’s rating in part because of the mere possibility that the state might eliminate its income tax, which Moody’s warned would harm its ability to pay its debts in the future. Lower bond ratings require a state to pay bondholders more to finance infrastructure investments. That means either state spending on payments to the (mostly out-of-state) bondholders has to go up, or capital projects have to be scaled back.