Tax Reform Proposals Risk a Return to Austerity
Nathan Kessler | December 20, 2024
The 2025 legislative session has yet to kick off, but some lawmakers are already considering pursuing major property tax reform through assessment limits, mill levy reductions, or some combination of the two. Tax and expenditure limitations like these often have unintended consequences that end up harming low- and middle-income families. For this reason, tax relief is typically best delivered through targeted policy that eases the burden on those with the greatest need.
Broad-based reforms to long-standing systems tend to be costly, both in terms of their effect on the budget and their impacts on services, systems, and people in the state. Much like the failed Brownback tax experiment, tax reforms like those being discussed could lead to service disruptions, budget cuts, and financial instability.
For example, reducing the statewide mill levy that partially funds K-12 education for Kansas kids would require more money from the State General Fund (SGF) be spent to make up for the shortfall. If the state budget does not balance, lawmakers could be forced to cut education services or other investments that many Kansans rely on.
Fortunately, Kansas does not need to be a petri dish of bad tax policy again. We can not only heed the lessons of our own past, but also two other states that have implemented disastrous tax experiments. California’s Proposition 13 and Colorado’s Taxpayer Bill of Rights, commonly referred to as TABOR, were enacted with good intentions. But as you will see, good intentions do not always mean good policy.
Case Study 1: California
If you think buying a home is challenging now, a proposal being considered by some Kansas lawmakers would amount to pouring gasoline on a fire. One version of the proposal would limit the amount that assessed values can rise annually through a constitutional amendment.
While this may seem like an effective way to combat rising property values, in reality it is a shortsighted measure that will distort the Kansas real estate market and shift the tax burden onto new homeowners, businesses, and consumers. We know this to be true because the proposed amendment is nearly identical to an amendment passed in California in 1978 called Proposition 13.
Proposition 13 was enacted in response to anger over rapidly rising valuations after California standardized its property tax system. This law limits assessed valuation increases to 2% annually except in the case of a sale of the property. The long-term effect of this assessment limit has been to lock people into their homes – and lock out others who cannot afford higher property taxes than their would-be new neighbors.
Essentially, because property taxes are tied to time of purchase instead of actual value, homeowners are reluctant to move. Locking in these homeowners also locks OUT people looking to buy a home and shifts the tax burden onto new homeowners. For this reason, many people who may want to move to California are unable to do so and decide to leave or move elsewhere. At a time when Kansas population growth is already sluggish, the state cannot afford to lock out would-be homeowners.
Beyond locking people into or out of a home because of these artificial measures, assessment limits force states and localities to raise revenue elsewhere. California’s income and sales tax rates are the highest in the nation. In Kansas, local taxing jurisdictions are very limited in their ability to raise revenues. The proposed constitutional amendment would almost certainly mean higher local sales taxes for consumers at a time when prices are already too high.
Case Study 2: Colorado
Another proposal for what some hope would be broad-based tax relief would mimic Colorado’s Taxpayer Bill of Rights, or TABOR. This benevolently named amendment limits growth in government spending to the annual rate of inflation plus population growth and requires any surplus be returned to residents in the form of a refund. This is another example of a policy that sounds much better in theory than in practice.
TABOR and similar legislation pose a serious threat to a state’s fiscal stability by operating under the assumption that government spending occurs in a vacuum when it does not. Government costs typically rise faster than the average rate of inflation due to their sensitivity to demographic shifts, such as population aging and migration, and the primary source of expenditures (primarily health care and infrastructure).
In Colorado, TABOR forced cuts to education that reduced teachers’ pay and cuts to health care that left the state unable to afford vaccines and health insurance for children or prenatal care for pregnant women who were enrolled in their Medicaid program. Conditions got so bad that voters in the state chose to repeal the policy for five years in 2005 in an effort to regain control of the state’s finances. Already constrained by the short time frame, this effort was further hindered by the onset of the 2008 recession.
While Colorado has since made an astounding economic recovery, it has many factors working in its favor that are not applicable in Kansas. Colorado’s booming population growth and tourism industries are unlikely to be replicated in Kansas – at least anytime soon. Further, Colorado has more diversity in its economy and state revenue streams than Kansas currently does. These differences mean that any TABOR-like measures in Kansas are likely to return us to the austerity and short-term financial maneuvers of the Brownback years with no clear path back.
Conclusion
None of this should be taken as opposition to providing tax relief to Kansas residents. Instead, the opposition is to sweeping reforms that mean well but have unintended consequences. Lawmakers should pursue targeted options that deliver tax relief to those who need it the most.
During the 2024 special session, lawmakers delivered on measures that provided tax relief to seniors and homeowners through exemptions that included Social Security income and $75,000 of a home’s assessed value.
In 2025, lawmakers should prioritize families and renters by implementing a state child tax credit and undoing the Brownback-era measure that removed renters from the Homestead Refund Program. These two measures would deliver much-needed relief to hundreds of thousands of Kansas households and provide greater financial freedom for families across the state.
By putting money back in the pockets of those who need it most, legislators would be investing in our state’s future by stimulating our economy and making Kansas more competitive in attracting and retaining residents.
Nearly 1 in 5 Kansas children do not know where their next meal will come from, and renters in the state experience poverty at much higher rates than homeowners. Alleviating the pressure felt by so many across the state is not only economically smart, but also a moral imperative that the Kansas Legislature can overlook no longer.
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