In 2012, Kansas lawmakers passed a large and rather unusual income tax cut. It was expected to reduce state tax revenue by more than 10 percent, and Gov. Sam Brownback said it would create “tens of thousands of jobs.”
In part, the tax cut worked in the typical way, by cutting tax rates and increasing the standard deduction. But Kansas also eliminated tax on various kinds of income, including income described commonly — and sometimes misleadingly — as “small-business income.”
Basically, if your income results in the generation of a Form 1099-MISC instead of a W-2, it’s probably not taxable anymore in Kansas.
Consider me. I draw a salary from The New York Times; if I lived in Kansas, I’d pay state income tax on it. I also earn income from other news outlets, including MSNBC, where I am not a payroll employee. That makes me a “small-business owner” in the eyes of the government, and if I lived in Kansas, my income from MSNBC would be tax-free.
While no state has gone as far as Kansas, four others — Missouri, Ohio, Oregon and South Carolina — have passed laws in the last decade that give some small-business owners lower tax rates than wage earners.
By creating this preference for some types of income over others, Kansas has run into at least five problems:
The Times has me on its staff, but it could commission freelance work from me instead. Income from the same work would then become tax-free under the Kansas rules.
A lot of the beneficiaries of the tax break won’t be small businesses.
Many are sole proprietors like me, who are fundamentally engaged in labor, not entrepreneurship, and aren’t likely to hire anybody just because they receive a tax break.