Category: Economy

Pass-Through Entities Account for 98% of Job Gains

New Census data shows that pass-through entities (proprietorships, partnerships, LLCs and sub-S corporations) added more than 54,000 jobs between 2012 and 2015, accounting for 98 percent of all private sector gains.  Most private entity types have seen little growth since 2012 but employment at the pass-through entities shot up by 12.7 percent. Kansas is also performing much better against the national average since the exemption went into place, going from 52 percent of the national average (2.4 percent vs. 4.6 percent) prior but is since at 92 percent of the national average (12.7 percent vs. 13.9 percent).

2015 PassThrough Jobs

Kansas Department of Revenue data indicates that a small portion of the job gains at pass-through entities could be attributable to companies converting from C-corporation status to take advantage of the exemption on pass-through income, but not much.  KDOR data on C-corp conversions for 2012 through 2014 shows just a slight increase in the rate of conversion to pass-through; it was 1.3% in 2012 and the average for 2013 and 2014 was 1.7%.

States that Spend Less, Tax Less…and Grow More

The amount that government taxes is determined solely by the amount it chooses to spend to provide services.  Every state provides the same basket of services (education, highways, social services, etc.) but some states do so at much lower costs.  For example, the states that tax income spent 42 percent more per-resident in 2015 than those without an income tax; Kansas spent 27 percent more.  States without an income tax have superior long term growth in jobs, wages & salaries and Gross Domestic Product and given that they also gained population from domestic migration, it appears that citizens find the lower cost services to be a good value proposition.

spend less tax less 2017

The same is true of the ten states with the highest and lowest combined state / local tax burden (as ranked by the Tax Foundation.)  It’s also noteworthy that states without an income tax and those with the lowest combined tax burden also have lower local taxes per resident, refuting the notion that states with low taxes merely shift the burden to local government.  Data for each state can be found here; job growth data in the above table has been revised to reflect new BLS data released since publication of the 2017 Green Book.

Taxes aren’t the only contributing factor to these disparate economic growth patterns but the ability to tax less leaves more money in the hands of taxpayers and enhances economic growth.

Record-setting employment in 2016

Kansas set another private sector employment record in 2016 according to data from the Bureau of Labor Statistics, with 1.157 million jobs.  The adjacent chart reflects average annual employment on a seasonally-adjusted basis.  Kansas added 9,100 jobs in 2016 despite challenges in oil & gas extraction and agriculture.

2016 private jobs

Total private sector employment will likely be even higher when the Bureau of Economic Analysis publishes its 2016 data.  BEA tracks all employment but BLS does not include proprietors or farm workers.  Farm worker employment may be soft but Kansas has seen proprietor employment increase by about 8,000 jobs annually between 2012 and 2015.

New Business Applications Setting Records

Kansas Secretary of State Kris Kobach reports new business filings set another record in 2016.  There were 18,147 new domestic business filings last year and the total number of entities in existence also set another record at 187,305.  The number of entities in existence does not include proprietorships.

New Biz apps 2016

Research conducted by Dr. Arthur Hall, Center of Applied Economics at the University of Kansas, shows that new business filings are extremely important to job growth in Kansas.  In fact, if not for jobs created by new start-ups, Kansas would only have had two years of private sector job gains between 1977 and 2014!

chart 2 yrs private growth

According to Dr. Hall, “Net job change has four components: establishment births, establishment deaths, establishment expansions, establishment contractions.  The table tracks net job creation starting with business establishments born in 1977.  An establishment represented by a firm age of zero is a new firm (a new small business).  A new establishment with age “Left Censored” is a new branch location of a very old firm–for example, a new Sears store or a new Ford Motor Company site.  In the database, firms are set to be as old as the oldest establishment in the firm’s portfolio.  For example, a brand new investment company that bought a string of 20 year old department stores would be set as age 20 not age zero.

The take-away is pretty stark:  Net new jobs come from brand new firms and very old firms.  Not many new firms make it to very old firms.  On balance, old firms shed more jobs than they create–mostly through establishment death.”

National Rank on Job Growth

The first three years after reducing income taxes saw the Kansas job rank improve nicely according to data from the Bureau of Economic Analysis.  Over the fourteen years leading up to 2012, private sector jobs grew by 6.3 percent and that growth rate ranked #41 among the states.  But in the three years since income taxes were reduced Kansas’ growth of 4.8 percent was ranked #31 among the states.

BEA job rank

As explained in “A Thousand Flowers Blooming – Understanding Job Growth and the Kansas Tax Reforms,” jobs data from BEA is more comprehensive than Bureau of Labor Statistics data because BLS excludes proprietors and farm workers.  The downside to BEA is that it often lags by as much as year whereas BLS publishes monthly.

Kansas also gained ground on its economic peers.  The authors of “A Thousand Flowers Blooming” measured the similarity of states by calculating correlation coefficients of the private sector workforce by sector for each of the 50 states.  States may share geographic boundaries, but much like nearby school districts’ can have dramatic demographic variances, so can state economies.

Prior to tax reform, four of Kansas’ economic peers had better growth but only three states did better since 2012 and one of them – Michigan – was coming off negative growth.

Preliminary data December 2016 data from the Kansas Department of Labor (which has the same data as BLS) and historic data from BLS shows average annual private sector jobs declined by 2,400 last year.  Most of that job decline was in rural areas (the Kansas City, Wichita and Lawrence metro areas had job gains), and much of that decline is likely attributable to weakness in agriculture and the oil & gas industry.  A recent sales tax analysis by the Kansas Department of Revenue shows sales tax receipts declining in areas that are especially dependent upon those segments of the economy.

However, proprietors aren’t included in that BLS data and they grew faster than other private sector jobs over the last three years, averaging 7,994 more per year.  It’s possible, therefore, that Kansas could have net positive job growth for 2016 when the BEA data is published.

Pass-through entities create most new jobs in Kansas

U.S. Census data shows that pass-through entities (LLC, sub-S corporations, partnerships and proprietorships) created most of the new jobs in 2013 and 2014.  Census only began tracking this information by state in 2010 and hasn’t published 2015 data at this writing so we only have two years of change before and after tax reform to measure; that said, pass-through employment grew much faster after tax reform.  Pass-through employment increased by 2.4 percent between 2010 and 2012 but jumped 8.4 percent between 2012 and 2014.

Pass Through jobs

Some of the pass-through job additions are attributable  to C-corporations that converted to pass-through status but most likely fewer than the number of new proprietors added, which aren’t included in the Census database; their employment data is provided by the Bureau of Labor Statistics which excludes proprietors and farm workers. The Kansas Department of Revenue reports that only 3.3 percent of C-corporations converted and the total number of W2s for all Ccorporations declined by 10,396. Even if every W2 decline resulted from a conversion, the job transfer would still be less than the 15,134 new proprietors reported by the Bureau of Economic Analysis.

Personal Income

Personal Income is often used as a measurement of economic growth but it can be skewed up or down by changes unrelated to private sector economic activity.  Media and others also have cited Personal Income changes to measure the efficacy of state tax policy even though large portions of Personal Income are unrelated. The phrase ‘Personal Income’ sounds like it might account for income people earn, but the federal government’s definition includes things in ‘income’ that people never see in their paychecks, such as employer payments for retirement programs and health insurance.  Personal current transfer receipts include some money available to spend or pay taxes like Social Security and unemployment payments but changes in those numbers are not results of economic growth or decline.  Other elements of personal current transfer receipts include payments for government medical benefits, veterans’ benefits, business liability payments for personal injury and corporate gifts to nonprofit institutions, none of which result from private sector economic activity.  Capital gains and corporate profits are measures of economic change but are not included in Personal Income.

KS Personal Income

Kansas Personal Income as defined by government only increased by 1.6 percent in 2014, but Private Nonfarm Wages grew by 4.8 percent; farm wages, non-farm proprietors’ pre-tax income and Dividends/Interest/Rent all increased much more than Personal Income.  The same was also true in 2015.

Change in personal income

Farm and non-farm proprietors’ pre-tax income can grow or decline because customers are spending more but they can also be influenced by other factors.  Weather heavily influences farm prices and production and while that does have an economic impact, it’s not driven by tax policy and cannot be used as a proxy for its efficacy.  The same is true of nonfarm proprietors’ pre-tax income, where outside factors such as health care insurance and raw materials prices can reduce profits.

Adjusted Gross Income Migration

Kansas historically has lost Adjusted Gross Income (AGI) due to migration in and out of the state, IRS migrationrecording net gains only in four of the last twenty-two years, but IRS migration data shows encouraging improvement.  Net AGI out-migration grew worse each year between 2009 and 2012 but the losses declined in 2013 and 2014.

Movement between Kansas and Missouri is dramatically different since Kansas reduced income taxes in 2012.  A record-setting $635 million flowed into Kansas from Missouri in 2013, and another $487 million followed in 2014.

KS Missouri IRS migration

States that spend less, tax less…and grow more

The amount that government taxes is determined solely by the amount it chooses to spend to provide services.  Every state provides the same basket of services (education, highways, social services, etc.) but some states do so at much lower costs.  For example, the states that tax income spent 48 percent more per-resident in 2014 than those without an income tax; Kansas spent 34 percent more.  States without an income tax have superior long term growth in jobs, wages & salaries and Gross Domestic Product and given that they also gained population from domestic migration, it appears that citizens find the lower cost services to be a good value proposition.

spend less tax less grow more

The same is true of the ten states with the highest and lowest combined state / local tax burden (as ranked by the Tax Foundation.)  It’s also noteworthy that states without an income tax and those with the lowest combined tax burden also have lower local taxes per resident, refuting the notion that states with low taxes merely shift the burden to local government.  Data for each state can be found here.

Taxes aren’t the only contributing factor to these disparate economic growth patterns but the ability to tax less leaves more money in the hands of taxpayers and enhances economic growth.

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