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So what exactly is the reckless Kansas policy that the Post-Dispatch editors tell us must be avoided at all cost? First, Kansas lowered its income tax rate from 6.45 percent to 4.9 percent on individual income. For small businesses, namely those organized as S-Corporations, LLCs, Partnerships, and Sole Proprietorships, cases in which business income that is passed through to owners, Kansas eliminated the income tax altogether.

What does economics tell us about the likely effect of such a policy? For simplicity, assume that there are two main sources of income: labor and capital. The former is the payment for supplying work effort to a firm. The latter is the payment for resources that you provide to companies and is usually returned to you after the risk you face is realized. So income from loans and other assets, along with returns to entrepreneurial activity, are deemed capital income. Given that government has to raise revenues for public needs, which should be taxed more — capital or labor? In research that Christophe Chamley and Kenneth Judd conducted independently, the conclusion is unambiguous: tax rates on capital income are very detrimental. Chamley’s and Judd’s work is in line with the analysis that two Nobel Laureates put forward: Peter Diamond and James Mirrlees, who argued that taxes should be applied to the most inelastically supplied goods. Because capital is so mobile, its supply is very elastic and the optimal tax rate on capital income is zero.

Ironically, the editors at the Post-Dispatch accept that people on the Kansas border are very mobile, just not in response to taxes. They argue that people move from Missouri to Johnson County, Kan., because of school quality. The unstated premise is that these people still work in Missouri. Will a substantial tax nudge not lead to even more people seeking out those Johnson County schools? Or, more importantly, induce employers to plant businesses where their employees want to live?

The issue for policymakers is this: for a given level of state revenue, what set of tax policies will yield the revenues while doing the least economic damage? Kansas is trying an experiment. There is an economic rationale for this experiment. If you have to tax income, there is good reason to try to separate out taxes on labor income from taxes on capital income, because capital is highly mobile. In spite of the editorial board’s heated rhetoric, the economic fundamentals favor Kansas on this one.

Joseph Haslag is chief economist and Michael Podgursky is a co-founder and director of the Show-Me Institute, which promotes market solutions for Missouri public policy.

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The new law reduces the state’s top tax on wage income from 6.45 percent to 4.9 percent. Much more dramatically, however, it also abolishes the state income tax for many entrepreneurs and small business owners.

Under the new law, partnerships, S-corporations, and sole proprietorships are now exempt from paying any state income tax in Kansas. For example, if the owner of an S-corporation has $10 million in sales and $500,000 in “pass-through income” — meaning income after wages and other expenses — he would pay zero taxes to the state of Kansas on his $500,000 income.

Officials in Kansas make no secret of the fact that they want to promote their state as a Midwestern tax haven — appealing to entrepreneurs and small businesses in neighboring states, including Missouri, which has a top individual income tax rate of 6 percent, or $30,000 on $500,000 in income.

If small business owners in Missouri, Oklahoma, or other states want the same deal that Kansas is now offering to more than 190,000 small businesses, they just need to relocate to the Sunflower state.

How big a threat does this pose to the future growth and prosperity of our state? As economists, we can offer a few back-of-the-envelope calculations.

Missouri entrepreneurs in the 11 counties bordering Kansas would presumably be among the first to move. The population within these counties is 1.48 million people, or just more than 24 percent of the state’s total. For 2010, the total aggregate income of people filing individual income tax forms in Missouri for partnerships, S-corporations, limited liability partnerships, and sole proprietorships is $13.2 billion. Based on the population distribution, we would therefore expect that people with pass-through income in the border counties would account for roughly 24 percent of the $13.2 billion, or $3.17 billion.

Let us suppose that 10 percent of small businesses and entrepreneurs in those border counties deemed it worthwhile to move. That would translate into a $317 million reduction in goods and services and a roughly 1 percent reduction in income in the border counties. Based on 2011 income per worker, Missouri would see about 4,500 jobs go across the border.

Of course, people in other parts of Missouri might also elect to take advantage of the welcome mat that Kansas has put out for entrepreneurs and small business owners and that would further erode the base of our already weak and under-performing state economy. Entrepreneurs who might otherwise have launched their new business in Missouri may choose to launch it in Kansas instead.

Oklahoma Gov. Mary Fallin is advocating a reduction in her state’s top income tax rate to 4.5 percent from the current 5.25 percent, and she has cited the new Kansas law as cause for urgency. “Oklahoma needs to compete with our neighbors,” Fallin said. “To do that we need to lower our income tax.”

In a recent press conference, Missouri Gov. Jay Nixon sounded strangely complacent, saying “we haven’t spent a great deal of time talking about what they (Kansas) did.” With all due respect, we suggest that this is something worth discussing.

Our lawmakers need to start thinking seriously about creating a more favorable tax regime for economic growth and job formation in Missouri.

Joseph Haslag is chief economist and Michael Podgursky is a co-founder and director of the Show-Me Institute, which promotes market solutions for Missouri public policy.

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Now let’s fill in the details.

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The good news is that two high-performing school districts have offered to take these students in large numbers. These districts do a great job of educating high poverty and minority children, and do so at much less than the $15,000 and $16,000 per attending student spent in Kansas City and Saint Louis, respectively. Moreover, decades of social science research has demonstrated that the types of schools that these districts run are exceptionally good at educating poor urban youth. So why isn’t our legislature rushing to take advantage of this remedy? The districts in question are the Saint Louis and Kansas City dioceses. This high-quality yet affordable option is off the table.

Why? Opponents argue that it is inappropriate to provide public funds for private religious schools. Indeed, strong language to that effect — Blaine Amendments, named in honor of the Maine senator who led the movement — was placed in Missouri’s and some other state constitutions in the late-19^th century precisely to prevent public monies from flowing to Catholic schools.

The Blaine Amendment, and the associated ideology, has warped K-12 education policy. In other areas of policy — including education — faith-based organizations routinely receive tax dollars to provide services for the general public. Missouri students can take their Bright Flight or Access Missouri scholarships to public institutions like the University of Missouri as well as private religiously-affiliated colleges such as Hannibal-Lagrange, Saint Louis University, or Rockhurst. Low-income parents in Missouri can use tax-supported vouchers to purchase pre-school care from religiously-affiliated providers.

In nearly all other areas of social welfare policy, public funds flow to faith-based organizations for social services. This is based on a recognition that government support for a service does not mean the government should be the only, or even the primary, producer. The public interest is best served if multiple vendors can compete to provide services and give consumers choices.

Freedom of choice is the key. In a voucher system where money follows the student to a school that parents choose, government is not favoring one religious doctrine over another. When a student takes his Bright Flight scholarship to Hannibal-LaGrange College or Saint Louis University, the state is not “establishing” or promoting one religious doctrine over another.

Charter schools provide valuable options to parents. The Missouri law, currently limited to just Kansas City and Saint Louis, should be extended to all school districts statewide. However, the charter schools currently operating in Saint Louis and Kansas City have a mixed achievement record. Some are producing above-average achievement gains for their students, whereas many are performing no better, and in some cases significantly worse, than the district schools. Over time, the low performers will be winnowed out. Unfortunately, substantial capacity of high-performing charters is needed now, not 10 years from now.

With each passing school day, the harm inflicted on Saint Louis and Kansas City children grows. The private schools have thousands of seats available for these children now. A remedy is looking us in the face.

Michael Podgursky is a professor of economics at the University of Missouri–Columbia and a member of the Show-Me Institute Board of Directors.

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At this event, Dr. Michael Podgursky spoke of the benefits of school choice, Dr. Susan Feigenbaum spoke of the negative impacts of discrimination in a free market, and Dr. Daniel Thornton spoke of the dangers of irresponsible monetary policy. Dr. Joseph Haslag moderated, and Dr. Bonnie Wilson introduced the event.

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A tuition tax credit program has been proposed for Missouri to address education inequality among low-income families. The terms of this program would grant Missouri taxpayers a credit on their state income tax bills for contributions to scholarship-granting organizations (SGOs) — not-for-profit education groups that are recognized by the state. In turn, SGOs would use these contributions to provide private-school scholarships to grade-school students who meet eligibility criteria set by the Legislature. During the past decade, four states have implemented similar programs. In this study, we show that other states have adopted education tax credit programs in order to help reduce inequality of educational access among low-income families, by making private-school alternatives much more affordable. The fiscal cost of a tuition tax credit program will depend on the number of parents who move their children from public schools to preferred private alternatives. This study assesses how the size of available scholarships would affect state educational spending at various levels of demand. Under the conditions we consider, a tuition tax credit program has the potential to save the state $7 million per year. Savings from a partial tax credit, in which taxpayers receive less than a dollar-for-dollar match on their contributions, may be as high as $17 million. For the purposes of this study, we use the parameters set in the most recent Missouri tax credit bill; i.e., it would be capped at $40 million annually and would fund scholarships to students in the Kansas City, Saint Louis, and Wellston school districts who reside in households with incomes lower than or equal to 185 percent of the federal poverty level.1 Approximately 92,700 students in these districts meet the financial eligibility limits, 9.4 percent of whom currently attend private schools.

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To date, Columbia Public Schools has spent roughly $82,000 on the “adequacy” lawsuit, despite the fact it is a no-win venture for the community. Several other plaintiff schools have come to a similar conclusion and have declined to join the appeal. CPS should do the same.

The plaintiff school districts are spending tax dollars to hire private law firms to sue the Legislature — i.e., us — and the attorney general’s office has used tax dollars to hire a private law firm to defend the Legislature. The cost so far, just for private law firms, is more than $4.6 million, and that does not count the time of the attorney general’s staff lawyers or the court. I find it remarkable that some members of our school board think this is an appropriate way to spend education revenues. During the 10 years I spent as chairman of the University of Missouri–Columbia Economics Department, it never occurred to me it would be acceptable to use some of my department budget to sue the Legislature for more money, even though MU is also mentioned in the Missouri Constitution.

Issues of propriety aside, let us turn to some specific reasons I believe CPS is ill-advised to continue its participation in this lawsuit.

First, it would be difficult for the plaintiffs to have lost this case more completely. Judge Richard Callahan’s decision is clear, concise, and logical. The “adequacy” aspect of the lawsuit was based on the Missouri Constitution’s requirement for free public schools and the stipulation that the Legislature must devote at least 25 percent of revenues to that end. Judge Callahan ruled both requirements are being met easily. The plaintiffs asked the judge to read something into the state Constitution that is not there, and this he refused to do. Of course, the notion that a given level of spending can be reliably associated with a given level of MAP achievement — “adequacy” — was never established by the plaintiffs because it is statistically impossible to do so, a point made repeatedly by the three economists, including myself, who testified for the defense.

Second, as the magnitude of this defeat becomes more widely recognized, the “tax base” of paying plaintiff districts is shrinking. Some major districts have publicly dropped out of the case, including St. Joseph, Liberty, and Francis Howell. More are expected to follow. As the number of participating districts falls, Columbia Public Schools and Columbia taxpayers will be left to bear a larger share of the litigation bill. That might make narrow sense if there were reason to believe that, ultimately, there is something in this for Columbia, but that is the biggest folly of all.

Let’s begin with the “equity” issue. Under the current system, CPS fares well. We are a relatively wealthy district that enrolls 1.5 percent of Missouri public school students, yet receives 1.7 percent of state K-12 funding. Our per-pupil spending is higher than the state average. What can CPS hope to gain in an “equity” lawsuit? Is a Cole County judge likely to find Columbia schools relatively impoverished?

Now, let us consider “adequacy” — the argument that almost all districts are underfunded. The plaintiffs are asking for roughly $1 billion in additional state funds for K-12 education. If they are successful and the Supreme Court tells the Legislature it must spend $1 billion more on public education, that money must be found somewhere in the state budget. Given the Hancock limits on raising taxes, we must ask lawsuit proponents where they propose to obtain these additional funds for K-12 education.

With tax increases off the table, K-12 gains must come at the expense of the rest of the state budget. One billion dollars more for K-12 implies a 21-percent cut in spending for the non-K-12 budget. Assuming those cuts are across the board, the MU budget would be cut by 21 percent as well, in which case MU would lose more than the entire state funding of CPS. Whatever the size of the boost in K-12 spending, every dollar CPS would gain through this litigation implies at least a $2.25 cut in the MU budget. This assumes Medicaid is subjected to the 21-percent cut. If Medicaid escapes the across-the-board cut, the MU loss is even larger.

Along with making higher education even less affordable, a plaintiff victory must lead to cuts in a wide range of state-provided social services. The primary recipients of those programs, poor families and children, would end up worse off. We elect legislators to make these difficult spending decisions and to balance the complicated tradeoffs. That is not the job of our courts.

The most likely outcome of the appeal is that CPS simply will have wasted tax dollars on frivolous litigation. Our school board, however, is playing with fire. In the remote chance the plaintiffs win on appeal, the broader Columbia community might well be seriously harmed because of large cuts to the MU budget. It is time to stop participating in this nonsense and spend our education tax dollars on education — and not on $250-an-hour legal fees.

Michael Podgursky is a professor of economics at the University of Missouri–Columbia and a member of the Show-Me Institute board of directors.

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