Economic gold rush?
Or fiscal wreck?
Kansas Gov. Sam Brownback took a grand gamble Tuesday with a monumental tax plan that he hopes will spur an economic revival and not an unparalleled budget crisis that leaves state services in ruins.
While it wasn’t the plan Brownback quite wanted, the bill he signed Tuesday slashes state income taxes by roughly $3.7 billion over five years, with state fiscal analysts projecting budget deficits reaching $2.5 billion in 2018.
It’s described by one lawmaker as the “worst tax bill” to come out of the statehouse. Brownback, in contrast, saw it as a chance for the state to remake its business climate.
“We’re going to move this forward and make it work and take care of our fundamental services,” said Brownback, whose original plan for cutting taxes did more to pay for itself.
Plenty of skeptics believe that the governor’s approach will decimate state services. They point to forecasts showing that the tax plan will drown Topeka in billions of dollars in red ink.
The tax cuts will “have an enormous impact on everything from public education to public health coverage to infrastructure to other vital social safety-net services,” said Shannon Cotsoradis, president of Kansas Action for Children. “This is not a bill that’s good for low- and moderate-income families in Kansas.”
The plan collapses the state’s current three-bracket system to two brackets starting in 2013. It cuts the highest income tax rates to 4.9 percent from 6.45 percent and 6.25 percent. It also reduces the lowest tax rate to 3 percent from 3.5 percent.
The tax measure also allows the state sales tax to drop by six-tenths of a cent in 2013. It keeps deductions for charitable contributions and interest on home mortgages.
However, the plan wipes out tax credits used by hundreds of thousands of Kansans, including food sales tax rebates and credits for taxpayers who have to work and must care for children, disabled dependents or spouses.
The heart of the bill also exempts non-wage business income for 190,000 limited-liability companies, sole proprietorships and the like. That provision, in particular, is aimed at job creation.
Brownback’s goal has always been to put more money into the hands of Kansas taxpayers. He hopes that they’ll use those dollars to energize the economy.
“My faith is in the people of Kansas,” Brownback said, “not its government.”
Brownback said the less affluent would not be hurt by the tax cuts.
“The best thing we can do for individuals in this state, and particularly for somebody that’s struggling, is to provide jobs and job opportunities,” the Republican governor said. “That’s what this does.”
It would be more popular to cut property taxes, Brownback said. In fact, Democrats argued for that throughout the legislative session. But the governor said property tax cuts wouldn’t power the economy as well as income tax cuts.
“That would be good and I would be for it,” he said, “but it doesn’t create growth.”
Brownback promised to fund core services like schools and roads, but vowed he would continue to cut state government.
“We’re going to keep pruning state government any place that we can,” the governor said.
The plan the governor signed Tuesday was far different from what he proposed in January.
His original plan would have similarly cut taxes, but that earlier proposal also would have been paid for through elimination of many tax credits and deductions — like those for interest on home mortgages and charitable contributions.
Yet those proved among the most popular to legislators’ constituents, and ultimately too politically sacred to get rid of.
Indeed, few thought the plan that the governor signed Tuesday would ever have made it as far as it did.
The Senate effectively killed the tax makeover in March. Yet hours after that defeat, senators reversed themselves and passed the bill on the belief it could restart negotiations.
Instead, when senators appeared to balk at more modest tax cuts early this month, the House called their bluff, and passed the bigger tax-cut bill.
And that was the tax overhaul Brownback signed on Tuesday.
The governor said he would have settled for a compromise tax plan that cut less aggressively into state government revenue.
But he couldn’t persuade senators who were distrustful of financial projections and pushed for more moderate reform.
Going forward, the questions facing the state will be when — or how — the tax plan’ will succeed or fail and what the fallout will be for critical state services.
Nick Jordan, the state’s revenue secretary, said the administration ultimately imagines the creation of 22,000 more jobs over “normal growth” and 35,000 more people moving into the state over the next five years. And he expects the tax changes to expand disposable income by $2 billion over the same period.
The governor’s plan to zero out non-wage taxes on mostly smaller businesses turns Kansas into something of an economic proving ground. Economists disagree about what the state might get from its tax-cutting experiment.
Partly, because the idea of eliminating taxes on just one type of business — the small ones — hasn’t been tried in other states.
“It’s bold. It hits the right target,” said Art Hall, executive director of the Center for Applied Economics at the University of Kansas’ School of Business, who helped develop the plan.
But he said “it’s a 10-year play, or more.”
Critics predict it won’t drive businesses to Kansas. It won’t, they say, make entrepreneurs out of anyone who wasn’t already inclined to start a business. In particular, they say state taxes are dwarfed by federal taxes, and that the cuts represent a relatively small lever working the gears of the Kansas economy.
“I don’t think it has a big effect,” economist Michael Wasylenko, in the Maxwell School of Business at Syracuse University, said earlier this year as the bill wound through the legislature.
Even ardent supporters of the tax-cut plan said it doesn’t come with economy-juicing guarantees.
“There is nothing that is absolute,” said Alan Cobb of Americans for Prosperity. “(But) is it any more of a gamble than what we were doing before? We had high tax burdens and high spending, and we had some of the best roads in America and, guess what, people were leaving Kansas to pursue economic opportunities elsewhere.”