KEPC UPDATE: Federal tax reform could mean a “windfall” for Kansas

Kansas could get an unexpected boost in state revenues if federal tax reform is enacted. Few in state government understand or are discussing the possibility.

If federal tax reform passes, Kansans could be paying less federal income tax, resulting in more income in their pockets.  However, that additional income would be subject to state income tax, meaning more revenue for the state.

It would be an unlegislated state income tax increase and it has happened before.

The phenomenon occurred in Kansas and other states after Congress passed the Tax Reform Act of 1986, a bill introduced by Democrats and supported by President Ronald Reagan.

Federal income tax cuts for individuals were about $60 billion.  They were offset by eliminating tax loopholes and shifting the burden from individuals to corporations.

Because Kansans were paying less federal income tax, their income subject to state income tax was larger, resulting in an unlegislated state income tax increase.  The 1988 “windfall” to state government was estimated at over $150 million.  That roughly translates to about 7.5% of the budget at the time.

There was also an unexpected windfall in Kansas corporate income taxes due to the federal changes.  Corporate revenues were over $70 million above the estimates.

Because the federal changes were phased in, the legislature had to deal with the issue over multiple years and through two administrations (Governors Mike Hayden and Bill Graves).

I was a reporter in 1987 and did a story on the possibility of a “windfall” to state government with the sole state legislator who had the issue on his radar.  No one else was discussing it.

That lawmaker was State Representative Henry Helgerson (D-Wichita), who returned to the Kansas House in 2015 after an absence of several years.

These days, there is one organization that does have its focus on this issue: the National Council of State Legislatures (NCSL), which put out some information on the possibility in January.

A few of their comments:

“What will the states do with potential revenue windfalls – Based on current state conformity with the IRC (Internal Revenue Code), there is likely to be a revenue windfall for the states if the Blueprint passes. – Will states reduce rates or otherwise attempt to make the overall impact revenue neutral?

“States are likely to receive significant revenue increases from conformity with other Blueprint provisions: – Border adjustability; disallowance of interest deductions; elimination of many corporate and personal income tax deductions.”

Of course, we don’t know if federal tax reform will pass or what form it will take.  That would affect the impact on Kansas.  However, the Washington discussion seems to include a consensus that federal tax reform has a better chance than previous attempts at major legislation since the Trump Administration began.

If there is a windfall, it could be a big piece in solving the puzzle of how to fix damage to state services brought on by the 2012 income tax cuts.