May 28, 2024

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Statistical Noise Crowds Kansas Tax Reform Study Findings

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It’s almost a year old, but researchers posted to the Internet a study reviewing the impact of Kansas’s 2012 tax reforms on April 26.

The 2012 tax reforms created a tax-exemption on LLCs, or pass-through entities, in addition to eliminating a top income tax bracket and reducing individual income tax rates.

Authored by researchers at Indiana University and the University of South Carolina in July 2016, the study found a small increase in those reporting income from pass-through businesses. Researchers also revealed that the tax reform may have encouraged some workers to shift from employee-status to contract work to take advantage of changes in the Kansas tax code.

They found a 2 percent increase in the likelihood of individuals reporting self-employment income in 2013 and 2014. Wage income reporting declined by about .2 percentage points in those years.

Dr. Art Hall

Art Hall, Executive Director of the Center for Applied Economics at the University of Kansas School of Business, called their research efforts the “gold standard.”

“But when they describe their results, it’s pretty weak,” Hall said.

The researchers followed random Social Security numbers to determine that some individuals in Kansas switched from receiving W-2 income to receiving 1099 income from the same employer following the 2012 tax reform.

“Their magnitude of numbers are relatively small,” Hall said. “They caveat themselves throughout the paper. They’re admitting it’s pretty weak.”

The researchers attribute the tax reform as motivation for people changing their employment status to avoid paying income taxes.

“It’s going to be hard to know why people did what they did, because the magnitudes are so small. They tried to test for that, but they still don’t know,” Hall said.

The researchers used taxpayer data between 2010 and 2014 and compared the data to what occurred in surrounding states.

Attributing tax file changes in 2013 to 2012 tax reform seems problematic, according to Hall. The changes in 2014, the second year of post tax reform data, may be easier to attribute to Kansas tax policy reform. It takes time for businesses to learn about changes to the tax code and implement changes in their own structure, so the first year data may not reveal the motivations for people shifting their income.

 In 2013, Hall was traveling around the state talking to people about the tax reform.

“Many didn’t even know about the change,” he said. “They didn’t know that small businesses essentially had a lower tax rate.”

Dave Trabert, president of the Kansas Policy Institute, said it’s not surprising that some people shifted to take advantage of the tax reform.

“Of course there were conversions, but (the study authors) say none of it was organic growth, and that’s just nonsense,” Trabert said. “There may have been some individuals that found some ways to go to 1099s instead of W-2s. But nothing indicates a massive shift.”

When legislators implemented the tax changes, they planned to eventually eliminate the income tax altogether. Known as the glide path to zero, the intent was to give everyone the same benefits pass-through entities receive: no income taxes.

“People have forgotten that at the time all of this happened, we were going to get rid of the income tax,” Hall said. “At that point, that there was going to be some tax planning–some people shifting–who cares how fast people get to zero? We’re going to get rid of the income tax.”

The policy included some natural constraints limiting the number people shifting. The federal tax code, for now, requires pass-through entities pay income taxes. Also, employees who forgo W-2 earnings give up employer-provided health benefits and retirement savings.

The researchers did a credible job, Hall says.

“But the authors admit there’s tons of statistical noise,” he said.

Trabert said Kansas’ job growth picture has improved since 2012. He points to data from the U.S. Bureau of Economic Analysis, or BEA stats. From 1998 to 2012, Kansas ranked 41st among the 50 states in private sector job growth.

“In the three years since the tax reform, Kansas private sector job growth is ranked number 31,” he said. “Kansas is doing a little better than it was before.”

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