In 2012, Kansas lawmakers passed a large income tax cut that was intended to reduce revenue from taxes by a little more than 10 percent,according to Josh Barro writing for The New York Times. Gov. Sam Brownback said at the time that these cuts would create “tens of thousands of jobs,” which would more than justify the cut. This cut reduced tax rates and increased the standard deduction, as per usual, but also eliminated the tax on a number of income types entirely, including that on 1099-MISC income, which is sometimes referred to as “small business income.”
Abilene, KS
Unfortunately, these cuts may have had an unintentionally large effect, as the state expected to collect $651 million from personal income tax in April and May, according to the news source. It received $369 million.
Unfortunately for Kansas, it seems that the tax cuts are also doing little to effect job creation, and employment figures have trailed both the national average and those of most surrounding states since he signed the bill, Barro explained.
Part of the problem may be a misunderstanding as to what “small business income” is. While there exists a stereotype of small businesses as the employment leaders that drive the economy, many on-paper small businesses do not employ anyone. A writer who freelances for a variety of publications, for example, is considered a small business, as is a contractor and anyone else who works for him- or herself.
Another problem is that many people are able to “shift” income from one category to another. By eliminating tax on 1099-MISC forms, Kansas made it extremely attractive to collect income in this way.
Finally, an economic study conducted in 2013 and published in The Review of Economics and Statisticsfound that, while new companies create more jobs than old ones, small companies were no more likely than large companies to create jobs.
Find out more about the changes going on in the Sunflower State:
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