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Kansas’ second credit rating downgrade by a bond rating agency has rekindled debate on how tax cuts affect budget bottom lines, taxpayer pocketbooks, and quality of life. In August, Standard and Poor’s reduced the state’s credit rating from AA+ to AA. This follows last April’s credit and bond downgrade announced by Moody’s Investors Services citing a concern over revenue declines and a lack of budget cuts to make up the difference.
The 2012 Kansas tax cuts reduced the personal income tax bracket from 6.45% to 4.9%, and more importantly for some, eliminated the income tax on small business income.
Three months ago, the 2014 Missouri legislature overrode the Governor’s veto to enact more modest tax cuts of its own. The Missouri tax cuts have a more gradual implementation format that will begin in 2017. The Missouri tax changes include a reduction in individual income tax rates eventually bringing the top tax bracket down to 5.5%. It also phases in a new 25% deduction for business income reported on personal income tax statements which is designed to provide tax relief to sole proprietors and owners of “pass-through” entities such as partnerships, S corporations and most limited liability corporations.
Ohio, Oregon and South Carolina have also passed laws to provide similar tax relief to some small business owners and individual taxpayers.
Though the Kansas tax cuts were initially promoted as a “shot of adrenaline” to the state’s economy, the rapid drop in revenues affecting the state’s credit and heavy media exposure is now affecting voter confidence as Governor Sam Brownback seeks re-election. Economists say it could be ten years before the actual benefits of the tax cuts will be revealed as it takes time for businesses to grow and new businesses to start.
Kansas Secretary of State Kris Kobach issued a statement that business formation has hit an all time high two years in a row. Kobach said, “This is not a one-year outlier; it is a meaningful trend. Kansas is clearly becoming a great place to start a business.” But the release also said the increase is due to the fact that filing to become a business has been made easier and has little to do with the state’s tax laws.
Some small business associations say business owners see their number one problem is not income tax, but rather the lack of access to capital and the high cost of credit.
In Missouri, experts predict the new tax cuts say won’t be fully realized until 2022. The Missouri tax cuts also can only be implemented if annual revenue thresholds are not achieved which could delay results even longer.
While taxpayers may wait a few years to realize the affects of tax cuts on their tax bill, state revenue collections have already dropped significantly in Kansas and it appears the power of politics and media influence is moving faster than legislative budget solutions. If the upcoming elections result in new leadership with different tax philosophies, Kansas’s income tax climate could again change.
Nationally, eyes are on states who are working to pass some kind of tax reform even as federal individual income and self-employment taxes are on the rise and businesses face looming expense hikes due to health care reform mandates. How things settle for Kansas and Missouri, especially through the 2014 and 2015 tax seasons, could determine how other states develop their own solutions for tax and revenue troubles.
Regardless of the tax environment, here at McRuer CPAs we constantly monitor these developments and advise our clients about the best strategies and actions to meet their individual and business tax planning goals. Feel free to contact us for more information or set up an appointment to review how state and federal tax changes may affect your bottom line.
