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1 Scott Drenkard, Kansas' Pass-through Carve-out: A National Perspective 1 (2016)

handle is hein.taxfoundation/kspacrvo0001 and id is 1 raw text is: Kansas' Pass-through Carve-out: A National Perspective Scott Drenkard Economist & Director of State Projects, Tax Foundation Kansas House Committee on Taxation March 15, 2016 Chairman Kleeb, Vice Chairman Suellentrop, Ranking Member Sawyer, Members of the Committee, Thank you for the opportunity to speak with you today. My name is Scott Drenkard, and I'm an economist and the director of state projects at the Tax Foundation. For those unfamiliar with the Tax Foundation, we are a non-partisan, non-profit organization that has monitored fiscal policy at all levels of government since 1937. We have produced the Facts & Figures handbook since 1941, we calculate Tax Freedom Day each year, and have a wealth of data, rankings, and other information at our website, www.TaxFoundation.org. While we take no position on legislation, we hope to offer our insights and provide a national perspective on tax issues. Kansas' pass-through exemption is costly and forced other tax increases In 2012, Kansas enacted a tax cut package that reduced income tax rates while completely eliminating income tax on pass-through entities like LLCs, S corps, partnerships, farms, and sole proprietorships. At the time, we warned that the pass-through exemption did not have good economic justification and would encourage economically inefficient, though tax-reducing restructuring activity. We also warned that the tax reductions, while producing positive economic benefits, would cost revenue and ultimately need to be paid for either by cutting spending or increasing taxes elsewhere. In 2013, revenue dropped by $700 million ($300 million more than predicted). Spending that year was only cut $150 million. These numbers are quite large for a $6 billion general revenue fund. The state delayed a planned cut to the sales tax, weakened the generosity of itemized deductions, and drew down reserves to make ends meet. FY 2015 had a significant cash deficit, masked by draining the rainy day fund and beginning balances, and helped by very slow spending growth (only 1.1 percent from the previous year). At the beginning of FY 2016, budget deficits widened sufficiently and spending remained adequately high that hikes to other taxes were necessary to make the budget balance. The state