The Trump tax reform Kansas conservatives regret
- Published
The president and congressional Republicans have presented a new plan for tax reform that feels very familiar - and troubling - to some Kansas conservatives.
LeEtta Felter, a lifelong Republican, once hosted a "ladies tea" at her house in Olathe, Kansas, for Governor Sam Brownback, a proponent of radical tax cuts.
In 2012, Brownback led Kansas in its own tax reform, creating the "LLC tax break", which reduced taxes on income from pass-through businesses.
Pass-through businesses come in different sizes: they range from family farms to law firms, real estate agencies and hedge funds.
They have one thing in common, though: the firm's profit "passes through" to its owner and is taxed at the individual, not the business, rate.
The tax package was designed to help entrepreneurs. For some, though, it turned into a nightmare.
Felter sold her family's business, Midwest Truck Sales, and lost "north of half a million" because of rules in the tax package.
"It ate our profits up," she says.
Trump and congressional Republicans have now put forward their own ideas for tax reform, including a version of the tax break used in Kansas which would lower the tax rate on pass-through businesses - from a ceiling of 39.6% to 25%.
The White House hopes the overall tax package will accelerate growth; the president described it as "a big beautiful Christmas present" for the US.
Financiers, lawyers and hedge-fund managers - and the president himself - could take advantage of such a break. Hundreds of President Trump's business entities are classified as pass-through companies and could benefit from the change in law. How much is unclear without Trump's full tax records.
Tax reform is a touchy issue for Kansans. The "Kansas experiment" was so contested US Senate Democrats held a hearing, external last week on the experience.
"We're a great example of what not to do," Felter said, describing the tax cuts Brownback and lawmakers implemented in her state.
Brownback and the state legislators were guided by a supply-side guru, Arthur Laffer, the economist who once advised Ronald Reagan and, more recently, Trump.
In the 1970s, Laffer argued that lowering taxes could lead to higher revenues. Reagan put his theory into practice (unfortunately, the budget deficit went up - not down), and so did Brownback, external. He consulted with Laffer about tax cuts in 2012, paying the economist a $75,000 fee, and began the state-wide "experiment", as Brownback described it.
Kansas' law eliminated state taxes on pass-through entities and reduced income tax that individuals pay - from a top rate of 6.4% to 4.9%.
This had a dramatic effect.
Tens of thousands of people "re-labelled themselves as LLCs", says Kenneth Kriz, a public finance professor at Wichita State University, effectively paying no state taxes on their business income.
Kansas governor Sam Brownback's popularity has waned
A farmer making $50,000 a year could call himself an LLC, Kriz explains, and save about $3,000.
For hedge fund managers, Kriz says, the savings would be significantly higher.
The biggest impact on the state was straightforward: there was less money. From 2012-16, income tax revenue fell by 23%, explained Bloomberg 's Justin Fox, external, citing data from the Kansas Department of Revenue.
As Kriz explains, the state ended up with "a very large budget deficit". Resources for education, road repair and other basics became tight.
"The shot of adrenaline that our governor had promised did not happen," says Dinah Sykes, a Republican state senator.
Some told Kansans to be patient. "They would just say: 'It needs time,'" Felter recalls. "So those acrobatic antics by card-carrying conservatives have decimated our state."
Not everybody agrees with her assessment of the state's tax reform.
"It's capitalism at its best," says one entrepreneur, Bob Aldrich, who thinks the new tax law helped him start his own business.
He borrowed $12,000 from his mother-in-law to start a railroad parts supplier in 2013. Within five years, his company had $4.4m in sales.
He blames lawmakers for the state's problems.
"Our legislators need to quit spending our money like drunken soldiers," he says.
Kelly Arnold, the chairman of the Kansas Republican Party, agrees, saying legislators sabotaged the tax plan. "They kept spending."
But the "Kansas experiment" has ended. Earlier this year legislators changed the law, raising taxes.
Brownback, who's deeply unpopular in the state, is now planning to take a job in the Trump administration.
He's been nominated to serve as ambassador at large for international religious freedom.
Meanwhile Kansans are studying the president's tax plan.
"I get stay-up-at-night worry," Felter says. "What if what happened to our state happens to our country?"
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