A recent article covering Red Kansas and the leadership of Governor Sam Brownback, lays out a new trajectory for a Midwestern state that has decided to take Texas’ lead on tax policy, rather than that of California. Last month, Kansas Governor Sam Brownback turned the tide on Kansas tax policy, delivering on his legislative promise to ignite what the Wall Street Journal referred to as “the Heartland Tax Rebellion.”
His new system reduces personal income tax brackets from three-tiers to two-tiers, cuts the overall rates for each new bracket and lowers certain small business non-wage income from state income tax.
This new tax policy puts more dollars in the hands of working families and provides strong incentives for existing Kansas-based small businesses to stay in the state, and possibly expand. Importantly for Kansas, the simplified, lower rates have the potential to spur new business filings in a state that needs them.
Some state governments are realizing that simplifying local, personal and business income tax codes may be the best defense against anti-growth policies on the federal level. Certainly as this Fall’s presidential election looms, employers who are looking to expand in 2013 can take the Prairie State off their fly-over list. Economists, such as Art Laffer, have clearly demonstrated that taxing income harms any state’s ability to contribute to the total U.S. economy.
One strong signal Governors can send that declares their state is open for business is structural tax policy change. Business owners understand that a higher rate of return in the form of lower tax rates anchors more local investment. In my personal experience with Dimensional Fund Advisors, the path to relocation from California and its harmful tax policy was clear. We chose to move our headquarters to Texas, a state with no personal income tax, rather than moving to Missouri, which taxes personal income at six percent.
States that do not tax personal income, our most mobile resource, have the competitive advantage. On census moves, non-farm payroll employment, and gross state product (GSP) growth, they consistently beat my home state of Missouri, which ranked 48thin GSP growth in the last decade. Business owners are voting with their feet and the penalty is job loss, poor economic performance and diminishing influence in Washington. This fact becomes clear when one compares the growing number of Congressional seats in states that do not impose a personal income tax, while states that impose a personal income tax are suffering reduced political influence. Population migration between states is happening at a record clip and evidence shows that tax policies are a clear driver.