For as long as anyone can remember, Kansas and Missouri have been rivals. It may have started in the Civil War era, but the Border War has never really gone away, particularly on the battlefield of economic growth. Earlier this year, Kansas raised the economic development stakes dramatically by enacting massive state tax reforms and reductions. Kansas is aiming to bury Missouri — leaving the Show-Me State hopelessly behind in terms of new business and capital formation.
Don’t believe it? If so, that’s only because our governor and most of our lawmakers and business leaders have yet to wake up to what has happened.
For many years now, the economic development agencies in both states have fought to a draw, poaching business from each other through targeted tax credits and other subsidies to induce individual businesses to move from one side of the border to the other. Local governments have compounded the problem by offering tax incentives of their own to cater to a tiny contingent of well-connected companies, choking funds from libraries, schools, and other public services dependent on local tax revenues.
This high-stakes game was a win-some-lose-some proposition for both states, played out in a particularly frivolous way in the Kansas City region when corporations moved a handful of miles one way or the other to gain a temporary tax advantage – a situation not unlike the short-sighted Tax Increment Financing (TIF) wars seen in Saint Louis County. Then Kansas got serious about economic growth.
In May, Kansas Gov. Sam Brownback signed the biggest tax cut in the state’s history. The new law cuts the top personal income tax by more than a point to 4.9 percent, well below Missouri’s top rate of 6 percent. That would be cause enough for concern in Missouri if that was all Kansas had done. But more boldly, Kansas cut its tax on the non-wage pass-through income of businesses such as limited liability corporations (LLCs) and subchapter-S corporations (S-Corps), reducing taxes on the income generated from approximately 191,000 Kansas businesses to a rate of zero. Millions of small businesses nationwide are organized as LLCs and S-Corps that enjoy many of the legal benefits of a traditional corporation while being taxed like partnerships. A tax rate of zero on this income is awfully hard to beat, freeing capital for Kansas entrepreneurs to reinvest in their businesses and spend in the market.
The excitement brewing in Kansas does not have to stop there. Missouri may not have the chance to be the “first” to embark on the sort of economic development revolution taking place in the halls of Topeka, but it does not have to be the last. Significant and similar tax reductions and reforms are achievable in Missouri, if there is a political will for it in Jefferson City.
But what happens if Missouri does not act? The state will almost certainly be left behind — not only by Kansas, but by other smart, pro-growth leadership across Missouri’s western border. This year, Nebraska cut its personal income taxes and has primed the pump for future reductions. Oklahoma is seriously considering phasing out its income tax entirely, including deep near-term rate cuts.
If Missouri lawmakers do not arm the state with sound, broad-based, free-market tax reforms of their own, the state risks economic defeat at the hands of her cross-border rivals in one of the most important games imaginable: the one that will determine our future prosperity. We can turn this game around, but time is running out.
Brenda Talent is executive director and Patrick Ishmael is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.