Dave Helling recently responded to my Show-Me Institute colleagues’ piece on what Missouri should learn from Kansas’s tax changes a decade ago. He questions whether Missouri’s current discussion is meaningfully different from what happened under former Kansas Gov. Sam Brownback.

I respect Dave and welcome the debate. Kansas belongs in this conversation. But if we are going to invoke it, we should be clear about what it demonstrates.

Kansas did not experience instability simply because it lowered tax rates. It ran into trouble because revenue fell precipitously and the state did not appropriately adjust its fiscal structure. Lawmakers enacted sharp tax reductions, created a large pass-through exemption, and left spending commitments largely intact. The result was a structural imbalance.

That is the lesson.

Dave suggests that state tax policy has only a marginal relationship to economic growth. It is true that no state controls the national business cycle. But it does not follow that tax structure is economically irrelevant.

Growth reflects millions of individual decisions—where to work, invest, expand, or relocate. Tax policy influences those decisions at the margin. And marginal decisions, aggregated across an economy, shape long-run performance.

If tax policy does not meaningfully affect behavior, it becomes difficult to explain why businesses restructured to qualify for Kansas’s pass-through exemption, why cities such as Kansas City offer tax abatements and other tax incentives to attract employers, or why area policymakers worry about the Border War. Incentives matter. They always have.

Both Kansas City and St. Louis are about to vote on retaining their 1% earnings taxes. Does anyone doubt the tax is one more incentive to live and work outside city limits?

None of this means that tax cuts guarantee prosperity. Lower rates increase the after-tax return to work and investment; they do not override broader economic conditions. But acknowledging limits is not the same as declaring irrelevance.

Kansas was not a clean test of “supply-side theory.” It did not eliminate its income tax. It reduced rates quickly, carved out a significant exemption, and failed to align revenue reductions with sustainable fiscal adjustments. When revenues declined more than expected, the state lacked sufficient buffers.

That was a structural failure, not proof that tax policy is immaterial.

Missouri’s debate, then, should center on structure and discipline. Any serious reform would require conservative revenue estimates, a modernized and stable tax base, adequate reserves, and spending aligned with realistic collections. Without those elements, skepticism is warranted. With them, instability is not inevitable.

There is also a tension in arguing that tax policy has little influence on economic outcomes while simultaneously warning that changing it risks serious harm. If tax structure truly operates only at the margins, its effects—positive or negative—cannot be dismissed when convenient and amplified when politically useful.

The more accurate position lies between extremes. Tax structure is neither a magic lever nor a null variable. It is one component of competitiveness, and like any component, it must be designed responsibly.

Kansas offers a caution about execution. But the Kansas story does not settle the broader question of how Missouri should structure its tax system going forward.

That question deserves a debate grounded in fiscal mechanics and economic incentives instead of caricatures.

The post The Lesson from Kansas—and the Question for Missouri appeared first on Show-Me Institute.

On August 7, Patrick Tuohey joined Mundo in the Morning on KCMO to discuss the recent Missouri elections and whether they have any impact on the Kansas-Missouri border war over stadium subsidies for the Chiefs and Royals.

The post Do the Election Results Change the Border War? appeared first on Show-Me Institute.

In this episode, Susan Pendergrass speaks with Patrick Tuohey, Senior Fellow at the Show-Me Institute, about the Missouri-Kansas border war over economic development incentives. They discuss how the Kansas City Chiefs and Royals reignited the subsidies battle between the states, the history of the feud, the effects on local economies, and more.

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Produced by Show-Me Opportunity

The post The Chiefs and Royals Restart the Border War with Patrick Tuohey appeared first on Show-Me Institute.

Governor Parson said that Missouri would “do everything we can” to keep the teams in Missouri.

This is dangerous. The reason state and municipal leaders welcomed a truce in the economic Border War was not because of the damage it inflicted on others—it was because of the damage it inflicted on their own cities and states. When signing the 2019 truce, Kansas Governor Laura Kelly noted:

In the past decade, folks in Kansas and Missouri had to watch and wonder why economic development forces in each state spent huge sums — together, some $330 million — to pull businesses a few miles across the border, and only to create an illusion of success with practically no economic gain.

Parson agreed, saying, “Sometimes common sense does prevail. Because you don’t have to be a scientist to figure out [the Border War] was a bad deal for both states.”

Just because Governor Kelly is violating her own executive order does not mean it is in anyone else’s benefit to re-arm and ride to the sounds of guns.

The only ones who benefit from such skirmishes are the corporations that pit the two states and their various municipalities against each other. A prime example was Applebee’s, which crossed State Line Road repeatedly, adding no economic benefit to either side, but racking up sweet taxpayer-funded incentives for itself each time.

All that Kansas did the other day was provide the Chiefs and Royals leverage to play the states against each other—potentially increasing the costs to taxpayers in both states. Should the Missouri side present a package that is competitive, the teams will very likely go back to Kansas and ask it to increase its offer. This is how negotiations work. Will Kansas, now that it has gotten its developers, municipal leaders, and residents excited by the prospect of hosting the two teams, be able to say no? Or will it sweeten the deal, just a little bit, to meet this “once in a lifetime” opportunity?

Anyone can see how this quickly becomes a race to the bottom.

Many Kansans are happy to have Jackson County foot the bill—and the hassle—of dealing with the Hunts and the Shermans. Conversely, there are plenty of Missourians who wouldn’t be bothered if Kansas decided to pick up the tab—and the bond risk—of hosting those teams and all their demands of taxpayers. But responding in kind to Governor Kelly’s gambit is not good for Missouri.

The only way to grow an economy is for government at all levels to be good at the basics. Maintain your infrastructure, keep the public safe, protect property rights, and do so as effectively and efficiently as possible. Missouri leaders ought to keep that in mind.

The post The Border War Is Bad Because It Hurts Us appeared first on Show-Me Institute.

The post Open Letter to Governors Parson and Kelly Regarding Stadium Subsidies appeared first on Show-Me Institute.

A version of this op-ed was published in the Columbia Missourian.

Missouri and Kansas are no strangers to border conflict. No, we’re not talking about the chaos that inspired ‘The Outlaw Josey Wales.’ The fear today is over cross-border job poachers. However, that doesn’t justify giving Fidelity Security Life Insurance $12.7 million just to stay in Kansas City. No one gets a gold medal in a race to the bottom — but politicians will waste endless taxpayer dollars trying to tell you that they’re ‘winning.’

The post The Kansas-Missouri Border War Isn’t Over appeared first on Show-Me Institute.

What is less surprising is that the governor of Kansas, who embarked on a highly publicized economic development truce with the governor of Missouri, is critical of the additional Waddell and Reed incentives. The Kansas governor is quoted in The Kansas City Star as saying:

My executive order limiting the use of state incentives was premised in part on Missouri local units of government bringing their property tax incentives to a level playing field with Kansas. Without that action, a true ceasefire cannot occur.

There always was less to the border war truce than people wanted to admit. The agreement was vague and full of loopholes, and I wrote as much in the Kansas City Business Journal in August. No piece of legislation or executive order is as important as a leader’s resolve, and without the ability to say no to incentives, the truce is meaningless.

The post Waddell & Reed and the Border War appeared first on Show-Me Institute.

The Kansas City region is unlike many in the United States in that the metropolitan area is divided almost exactly in half by the state line. The older and more urban part of region, Kansas City, sits in Missouri. The newer and more suburban post-war developments rest in Kansas. So the traditional urban-suburban economic wars seen across the country have an additional component: state interests. According to the Hall Family Foundation, the two states spent $335 million in the past decade trading employers only to see Kansas win a slight 1,200 net gain of jobs.

While the state action is welcome, the truce deal does not include all the various localities on either side of the state border. Cities may continue to offer incentives or other financial packages to lure existing businesses into their domain. While Kansas City, Missouri has pledged to honor the agreement, smaller suburban communities on the Kansas side have not. As demonstrated by the USDA’s recent announcement that it has chosen a site on the Missouri side to relocate some of its workforce, the two states will continue to fight an expensive war among themselves to bring jobs from afar. The Kansas City Area Development Council—a private non-profit which seeks to attract jobs to the region—still operates as a double-dealing promoter in the regional jobs Fight Club, collecting dues from both sides of state line and then repeatedly pitting them against each other.

Many of the individuals and organizations who profited handsomely from the years of combat have come out in favor of the deal. Sort of. The CEO of the Greater Kansas City Chamber of Commerce—a chamber whose portfolio includes both sides of the state line—recently told a local radio host, “I think it forms a new way to think about how we’re going to grow Kansas City where we really are looking to grow it in a net new way, not just moving companies from one side of the city to the other.” But moving companies and jobs from one side of the city to the other is exactly the economic development policy the Chamber has championed in the past and will likely champion in the future (e.g. a downtown baseball stadium for the Kansas City Royals).

Part of the problem seems to be that the folks who run such economic development programs are able to use questionable data in order to proclaim job growth and presumably justify their own budgets. For example, Waddell & Reed, a financial services firm originally located in Missouri but that crossed state line years ago in exchange for such incentives, started its incentives negotiations to return to Missouri just before the Border War truce was announced. In exchange for $62 million in Missouri incentives, it will move 1,000 jobs from Kansas. A spokeswoman for the Missouri Department of Economic Development heralded the move as good for the region, apparently unaware the jobs were already well within the region. One can be confident they will claim those jobs and new in their reporting documents.

Perhaps most notable of all is that the truce lacks precise language to describe exactly what it is prohibiting. Kansas Governor Laura Kelly’s executive order seems to restrict incentives to projects that create “net new” jobs. But that term is not defined. Could a growing Missouri firm already planning to make a few new hires take that plan to Kansas and seek incentives — using those “net new jobs” as leverage? How will Kansas assess whether those “net new jobs” were due to the incentives themselves?

Knowing the degree to which job creation or private investment is due to incentives has been a point of contention all along. Policymakers and developers point to all the new property development as proof of efficacy, but the vast majority of the economic research literature indicates that such development likely would have happened anyway, and that the return on investment of public dollars is small if anything at all. Private companies have learned how to game the system through a combination of over-promising, threats of relation, and fanciful accounting.

It is heartening to learn that other regions may be examining the Missouri/Kansas deal to see if it might work for them; the goals are laudable. But if policymakers are serious about ending these types of economic development incentive wars, all levels of government in the region need to be a party to it and the terms must be precisely defined. The allure of ribbon cuttings and claiming to be job creators is too great to leave to vague promises.

The post Skepticism Is Warranted on Missouri/Kansas Border War Truce appeared first on Show-Me Institute.

Simply cutting the vast majority of tax incentive spending would accomplish this; the less discretion the states have to spend your money on their cronies, the better. But a secondary option, relating directly to the incentive war itself, would be the establishment of a “truce” between Kansas and Missouri—for both states to largely or completely prohibit the issuance of incentives that would draw businesses from one state to another. What that might look like was outlined in a recent Kansas City Star article: 

Missouri first approved a bill prohibiting the use of state incentives to poach businesses in Douglas, Johnson, Miami or Wyandotte counties in Kansas in 2014.

But to go into effect, the law required Kansas’ governor to enact a similar ban on incentives to lure businesses away from Cass, Clay, Jackson or Platte counties in Missouri.

Kansas, under then-Republican Gov. Sam Brownback, balked at the plan. He came back with a proposal of his own two years later, but it ultimately yielded no agreement.

The Missouri law expired in 2016. A bill filed this year by Sen. Mike Cierpiot, R-Lee’s Summit, would renew it through 2021 to open the door for further discussion.

Extending the period for the truce to be offered is an altogether reasonable proposition, one that I would hope the state of Kansas would consider. In an ideal world, Missouri wouldn’t be doling out vast amounts of money on special projects; bad policy is still bad policy, and tax credit reform that puts a hard cap on incentives should still be the ultimate goal. That said, an all of the above approach that includes a “truce” is nonetheless appropriate as the state’s overall tax credit problem is whittled down.

The post Will There Be a Cease-fire in Kansas City’s Economic “Border War”? appeared first on Show-Me Institute.

Transcript:

It used to mean a football or basketball game, but now the Border War between Missouri and Kansas is more like a high stakes game of poker. Kansas has raised the ante by dramatically lowering taxes on both individuals and businesses. Governor Sam Brownback is betting that lower tax rates will ultimately mean more economic growth, and a bigger jackpot for the state.

So what should Missouri do?

Well its leaders can stay with a pat hand–one that has left the state lagging well behind others in growth–and risk having some businesses and citizens cross the border for the neighborly tax haven. Show-Me Institute economists say that could mean a loss of $300 million in goods and services, and 4500 jobs to boot. Or leaders can push for tax reform, lowering taxes and cutting tax credits so the state can compete, and maybe even win, the economic Border War.

This has been the Show-Me Minute. Learn more about the Show-Me Institute, where liberty comes first, click on our website at ShowMeInstitute.org.

 

The post Show-Me Minute: Border War appeared first on Show-Me Institute.

Health Outcomes Sciences, a health care software firm that started recently in Kansas City, is relocating to Overland Park and plans to expand its workforce from 13 to 37 employees over the next five years. …

The firm is seeking assistance from the Kansas PEAK program, which allows employers to keep up to 95 percent of their employee state income tax for up to seven years. Fiorito also said other factors figuring into the decision included the 1 percent city earnings tax charged in Kansas City and the new office’s proximity to where most of the company employees reside in Johnson County.

The Show-Me Institute has written extensively about the damaging effects of Kansas City’s and Saint Louis’ earnings taxes. In 2006, our chief economist, Joe Haslag, explained the impact of an earnings tax with this example:

[S]uppose that City A has no earnings tax, while City B has a 1 percent earnings tax rate. Other things being equal, the regression suggests that we should expect City B’s city-to-MSA per capita ratio to be 5.1 percent lower than City A’s city-to-MSA ratio. To put that in dollar terms, the average per capita income in 1990 was $13,076. Holding MSA per capita income constant, a 1 percent increase in the earnings tax rate translates to city per capita income falling by $667.

Translation? Even a 1 percent tax can be an ample incentive for workers to move out of a higher tax jurisdiction. That is a problem, especially if a city wants to retain its talent and grow its tax base. In the case of Health Outcomes Sciences, the workers were already outside the city. The business appears to have followed them out of town. And in case you were wondering, the Show-Me Institute has published a how-to for eliminating the earnings tax in Kansas City, appropriately titled “How to Replace the Earnings Tax in Kansas City.” Worth a read, particularly today.

There are many factors that go into a business’ decision to move from one state to another, but it is pretty clear that the earnings tax is not a negligible consideration. Kansas City should do a serious review of its own tax policies.

The post Another Missouri Company Leaving for Kansas, Citing, in Part, Kansas City’s Earnings Tax appeared first on Show-Me Institute.

Earlier this year, the Wall Street Journal wrote a similar piece about the incentives handed out for the Power & Light District in downtown Kansas City. We at the Show-Me Institute have long-criticized the wasteful use of incentives in this state and around Kansas City. David Stokes has heavily criticized the use of Tax Increment Financing (TIF) and has continuously advocated for statewide TIF reform. Last week, Michael Rathbone and I put forward a proposal to make Missouri more competitive and to mitigate the use of tax credits in Missouri. Soon we will publish an essay about the tax on pass-through income in the state, a topic about which Brenda Talent and I wrote in the Kansas City Star last month. Indeed, a lot can and will happen in the state over the next few months as the legislative session opens. Missourians who want to move the state forward do not have the luxury of sitting on the sidelines.

The post VIDEO: The New York Times Covers the Kansas City Border War appeared first on Show-Me Institute.

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.

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