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What's Not the Matter with Kansas

Article by Matthew Denhart February 13, 2013 //   4 minute read

Speaking at the Bush Institute’s April 2012 conference, “Tax Policies for 4% Growth,” Governor Sam Brownback described his efforts to make Kansas more competitive by driving down the state’s personal income tax rate. Brownback did just that last week when he signed into law a major tax reduction. The Wall Street Journal reports that the new law will cut the state’s maximum individual income tax more than a full percentage point and a half, to 4.9% from 6.45%. In addition, the state income tax on non-wage income will be eliminated for approximately 191,000 small businesses. Tax reform was much needed in Kansas since the state faces stiff competition from several of its neighbors. According to the IRS Statistics of Income database (The Tax Foundation offers a highly user-friendly tool to view the data), Kansas's net interstate migration was -8,587 from 2005 through the end of 2009. This means that 8,587 more people moved out of Kansas to the other states than moved from all other states into Kansas. With this out-migration, the state lost almost $974 million in adjusted gross income. Texas and Oklahoma were the top two destinations for residents leaving Kansas over this period. On net, Kansas lost nearly 11,000 residents and just under $315 million in adjusted gross income to Texas. Meanwhile a net of 4,386 residents and almost $100 million in income migrated to Oklahoma. Low tax rates are one thing that Texas and Oklahoma have in common. Texas is one of nine states that has no state individual income tax, and until last week, Oklahoma offered lower rates than Kansas. Oklahoma governor Mary Fallin — who also spoke at the Bush Institute’s tax conference — has recently announced plans to cut Oklahoma’s top income-tax rate to 4.5% from 5.25%. A wealth of research shows that people respond to tax incentives. For instance, in their book “Rich States, Poor States” Art Laffer, Steve Moore, and Jonathan Williams find that between 2001 and 2010, the nine states with no personal income tax saw population growth of 13.7%, compared to 5.5% for the nine states with the highest state income tax rates. These low income tax states also had faster growth in gross state product (58.5% versus 42.1%) and state and local tax revenue (81.5% versus 44.9%). The Nobel Prize winning economist Edward Prescott has studied labor differences between the U.S. and Europe. In 2004 he found that Americans worked approximately 50% more than the Germans, French, and Italians. His research suggests that marginal tax rates are the predominant force explaining this difference. Finally, analyzing rich countries in the mid 1990s, economists Steven Davis and Magnus Henrekson find through regression analysis that “a unit standard deviation tax rate difference of 12.8 percentage points leads to 122 fewer market work hours per adult per year, a drop of 4.9 percentage points in the employment-population ratio, and a rise in the shadow economy equal to 3.8 percent of GDP.” To be sure, people make decisions based on many factors and taxes do not explain everything. Even so, Americans have many states to choose from when deciding where to live and work. Why pay higher taxes in one state when your neighbors across the border get to keep more of their hard-earned money? States like Kansas understand that when it comes to taxes, competition is the name of the game.