Kansas’ fetish of small business is one of the reasons it’s broke

Tired of reeling from one budget crisis to the next, Republicans in the Kansas Legislature are considering repealing one of Gov. Sam Brownback’s signature polices: the tax exemption on income that people earn through limited liability companies.

Brownback continues to defend the LLC exemption, telling reporters last week that “a key piece of how you get America growing again is small business.”

Critics say the LLC exemption, in addition to contributing to the state’s budget problems, is unfair because it allows business owners to avoid paying taxes while their employees receive no such benefit.

Another reason to question the LLC exemption: Fetishizing small businesses, as Brownback and many politicians do, is ineffective policy.

Let’s be clear: Small business are great! They grow our food, caffeinate our mornings, cut our hair, fix our toilets and engrave our bowling trophies. You don’t have to work at one to appreciate the vitality that small businesses bring to their communities.

But they’re also limited in their ability to create wealth.

First, most small businesses are pretty small. Really small, in fact. Only 20 percent of the 28.8 million small businesses in the U.S. have employees. The rest are sole proprietors.

Second, staying in business is hard. According to the Small Business Administration, 406,000 businesses were started in 2013. But 401,000 business also closed.

When the LLC exemption went into effect, the Brownback administration said a hiring boom would follow. It didn’t happen, and Kansans are still waiting for Brownback’s tax policy to deliver. Last year, the state lost 4,500 jobs in the private sector.

Brownback relies on right-wing think tanks for policy suggestions, so it’s unlikely he saw a 2011 study that challenged the idea that small businesses are job-creating machines. The study, by two researchers at the University of Chicago, found that few small-business owners are determined to grow or innovate. Most are mainly interested in the “non-pecuniary benefits” — being one’s own boss, flexible hours — of self-employment.

To be sure, a world where everyone works for the government, a big hospital or a Fortune 500 company would be terrible. And large employers can be unstable, too, as anyone who’s been laid off by Hallmark or Sprint will tell you.

But the decision in Kansas to bestow special status in the tax code to small business owners was wrong in both theory and practice.