Kansas Legislators Repudiate Governor, Override Tax Veto -- 3rd Update

State legislators in Kansas have finally called a halt to Gov. Sam Brownback's experiment to create a red-state model of tax cuts to spur economic growth.

In a vote Tuesday night, legislators overrode his veto of a bill to raise taxes and close a nearly $900 million budget gap over the next two years. Though both chambers are controlled by Republicans, the House voted 88 to 31 and the state Senate voted 27 to 13 in a harsh rebuke for the governor.

The bill is expected to raise $1.2 billion over two years and close a projected shortfall of $889 million over the same period. It will also bring in more money for a court-ordered increase in public-school funding.

The bill ends an exemption on taxation championed by the governor that affects farmers and business owners organized as limited liability corporations.

They will now pay a rate of up to 5.7%. The bill also reinstates a top tax bracket and lifts the rates on the two lower brackets.

"We have worked hard in Kansas to move our tax policy to a pro-growth orientation. This bill undoes much of that progress. It will substantially damage job creation and leave our citizens poorer in the future," Mr. Brownback said as he vetoed the bill on Tuesday.

Tuesday night's vote ends a yearslong tax policy debate that has been closely watched at the national level as a proxy for supply-side Republican economic philosophy. Mr. Brownback and his allies were trying to show that cutting tax rates could spur economic growth and attract investment.

But rapid growth never came to Kansas, and the policy of removing the income tax on so-called pass-through businesses -- partnerships, limited liability companies and others that pay business taxes on their owners' individual tax returns -- proved to have significant loopholes.

Mr. Brownback's defeat is already echoing in the national tax-policy conversation. President Donald Trump and Republicans in Congress are attempting a similar -- though not identical -- idea. They want to give pass-throughs a lower top tax rate than wages as part of a broader remake of the federal tax system. They have promised to include rules that would prevent business owners from gaming the system, though they haven't offered details yet.

National Democrats pointed to Kansas on Wednesday as a cautionary tale about relying on tax cuts to spur growth.

"I'm pretty elated by the Kansas outcome and really relieved the legislature did what they had to do. I'm much less confident that D.C. conservatives will learn from Kansas conservatives," said Jared Bernstein, who was an economic adviser to former Vice President Joe Biden. "If substantive evidence could kill the trickle-down mythology, it would have died a long time ago."

Arthur Laffer, a tax-cut advocate and Brownback ally, said the state will be hurt by Tuesday's vote and that neighboring states such as Missouri will gain an advantage.

"I've never heard of a state being taxed into prosperity," said Mr. Laffer, who added that Mr. Brownback's original plan was hampered by budget-forecasting errors, the court-ordered school-funding increase and changes made by the legislature that removed revenue-raising provisions. "It's a very sad story, because I don't think Kansas is going to come out smelling like a rose with the reversal of all the tax cuts."

Mr. Brownback's office didn't immediately respond to a request for comment on Wednesday. He is a former U.S. senator who was elected to lead the state in 2010 and re-elected in 2014.

"The legislators who voted for this obscene tax increase have failed in their obligation to represent their constituents," said Kansas Secretary of State Kris Kobach in a tweet on Wednesday.

But some Democrats in the state celebrated the override after years of failing to get enough Republicans to join them to counter the governor. "All factions of the #ksleg -- cons, mods and progs -- voted to unwind Sam's march to zero madness. Your voices were heard tonight, Kansans!" tweeted Democratic Sen. Tom Holland.

In 2013, Mr. Brownback set out to create a lean, business-friendly government in his state that other Republicans could replicate. He instead faced a growing budget deficit, a flat economy and an increasingly fractured party.

Still, Mr. Brownback viewed his signature idea -- eliminating the 4.6% state individual income tax on pass-through businesses -- as a national model.

"My critics, which are many, they only want to look at the budget," Mr. Brownback said in an interview in December. "They won't look with any depth or detail at the impact on small-business growth or private-sector job growth. That's the target, that's what we're after."

The rates approved Tuesday will still be lower than they were before Mr. Brownback's tax cuts, said Joe Henchman, vice president at the Tax Foundation, a Washington group that favors lower rates and a simpler system.

"There will be people out there who will try to use this as evidence that all tax cuts are terrible and it's not," Mr. Henchman said, pointing to contrary examples of tax rate reductions in Indiana, North Carolina and the District of Columbia. "There are tradeoffs. And if you just want to cut taxes without any hard decisions on eliminating deductions or credits, you're likely to get a big deficit. If that was debatable before, I think that's what Kansas has taught us."

Write to Joe Barrett at joseph.barrett@wsj.com and Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

June 07, 2017 16:46 ET (20:46 GMT)