By Peter Hancock
April 27, 2016
Kansas lawmakers returned to the Statehouse following a five-week break Wednesday and immediately heard what may be the opening salvo of the 2016 election campaign, a call for total repeal of all the tax cuts that Gov. Sam Brownback and the Republican-controlled Legislature passed in 2012 and 2013.
Annie McKay, executive director of the left-leaning Kansas Center for Economic Growth, said lawmakers should consider that instead of the three options that Brownback outlined last week, all of which involve spending cuts and fund transfers but no new revenues.
“We’re here to call for Option Number 4, an end to the Brownback tax experiment,” McKay said.
McKay was joined in a news conference by former state budget director Duane Goossen, who is now a senior fellow at KCEG, as well as representatives from Kansas Action for Children, the Kansas Contractors Association and the Kansas National Education Association, the state’s largest teachers union.
Together, they called for repealing all of the Brownback-era tax cuts, effectively returning the state’s tax code to its pre-2012 status.
“If we were to restore the tax changes that were made in 2012 and 2013, arguably we would see a revenue increase of probably over $1 billion,” she said.
Although most lawmakers give that idea no chance of passing in the final days of the 2016 session, it will undoubtedly be a common refrain in political campaigns later this year as Democrats and moderate Republicans try to win back effective control of the Legislature from fiscal conservatives.
“I’m sure you’re going to be hearing about a lot of it because look what they have to do,” said Sen. Tom Holland of Baldwin City, the ranking Democrat on the Senate Assessment and Taxation Committee. “We had the largest tax increase in history last year (raising the state sales tax to 6.5 percent) to try to fill that hole, and it’s still not filling it.”
Brownback’s tax cuts
In 2012, Brownback’s second year in office, he pushed through a sweeping package of tax cuts that involved eliminating the state’s top income bracket and lowering income tax rates on the remaining two brackets, and completely exempting personal income derived from certain kinds of business operations.
The result has been that more than 330,000 farmers and small business owners pay no state income tax on their business incomes, and a significant reduction in taxes for all others who pay state income taxes.
According to the Legislature’s nonpartisan Research Department, the business tax exemption amounts to about $260 million a year. And while that may be the most politically controversial of the tax cuts, researchers say, the most expensive has been the cut in individual income tax rates, which is costing the state about $750 million a year.
Brownback said at the time of the tax cuts that they would stimulate the Kansas economy in the wake of the Great Recession and would eventually generate even more revenue in the form of sales taxes and other revenue streams.
The administration now points to certain economic numbers to support his claim: a record number of Kansans now employed; an unemployment rate of 3.9 percent, which is well below the national average; modest growth in personal income; and a large number of new businesses having started in Kansas to take advantage of the business tax exemption.
But critics say the Kansas economy would have rebounded anyway, and the recovery here has actually been slower than the nation as a whole.
“Kansas is getting back to its historic average,” McKay said. “The unemployment rate now is nothing terribly surprising. Also, the unemployment rate is dropping across the country and around in our region.”
Current budget hole
Meanwhile, despite the improved economy, the tax cuts have not resulted in a surge of sales tax revenue, despite last year’s effort to plug an earlier budget hole by raising the sales tax rate by more than one-third of a cent, to 6.5 percent.
According to new revenue estimates released April 20, the state of Kansas faces a $290 million revenue shortfall over the next 16 months, which is largely the result of lower-than-expected collections of sales and individual income taxes.
Brownback has offered three options for closing that budget gap, all of which start with sweeping $185 million out of the state highway program, forcing the delay of several major highway expansion and modernization projects, and cutting 3 percent, or $17.7 million, in funding from the state’s six universities.
In addition to those, Option 1 calls for selling off part of the state’s interest in future tobacco settlement money, which funds children’s health and early education programs. And Option 2 calls for delaying for another year a $92 million payment into the state pension system. Either of those would require legislative approval.
The third option, which Brownback could execute on his own if lawmakers do not act, would involve across-the-board cuts ranging from 3 to 5 percent to most state agencies and programs, including K-12 education.
“Unfortunately, the structural deficit that we are experiencing is unprecedented, and the options we’ve been given are not solutions,” former budget director Goossen said.
Tax bills waiting
Both the House and Senate tax committees are considering bills dealing with the business tax exemption. The House bill would repeal it entirely, although some want the increased revenue to be used to pay for lowering the state sales tax on food. The Senate bill would only tax 70 percent of that business income, leaving the exemption in place for the 30 percent that federal tax law refers to as “working capital” of those business entities.
Democrats have suggested they will be reluctant to consider anything short of a full repeal of the business tax exemption, acknowledging that even that won’t generate enough money immediately to solve the state’s current budget problem.
“We need to repeal the whole thing. It’s unfair and we need the revenue,” said Rep. Tom Sawyer, D-Wichita, the ranking Democrat on the House tax committee. “We’re hurting our schools, we’re hurting our roads, we’re hurting our quality of life in Kansas.”
Senate Vice President Jeff King, R-Independence, said he hopes the Senate bill can be voted out of committee this week, possibly as early as Thursday.
But Holland said he doesn’t believe the state’s budget problem can be fixed just by revisiting the business tax exemption, and he does not support the Senate bill.
“That’s just trying to put a happy face on a much larger problem,” he said.
But House Speaker Ray Merrick has indicated he does not plan to have full debate on the floor for any new bills during the wrap-up session, meaning the House will only vote on conference committee reports or on motions to concur or nonconcur with bills sent back to the House from the Senate.