Glowing words about the Kansas economy gushed regularly from Gov. Sam Brownback’s administration following deep income tax cuts enacted during the last two years.
“Firm financial footing.” “Signs of steady growth.” “We are seeing the Kansas economic engine running.”
But a new report out last week shows Kansas is losing revenue even as tax collections grew in most other states.
Kansas stood among 10 states with revenue declines for the first half of fiscal year 2014, according to a new report by the Nelson A. Rockefeller Institute of Government at the State University of New York. Of those states, Kansas saw the second-biggest decline. The drop-off followed income tax cuts that began in January 2013.
The news turned worse when April tax collections fell $93 million short of estimates, followed by a slight downgrade in the state’s credit rating. Overall, state revenues are down $480 million for the first three quarters of the current fiscal year. The state’s budget is about $15 billion.
Missouri lawmakers are watching the Kansas experience. Democrats fear the tax cuts approved this week over Gov. Jay Nixon’s veto will eventually leave holes in the Missouri budget.
“Our budget is in real trouble,” said Rep. Stephen Webber, a Columbia Democrat. “Any economic development policy that says, ‘We want to be like Kansas’ is an inherently bad policy.”
The Brownback administration says the drop in revenues was always expected in the aftermath of the tax cuts. It was just going to take a few years to spur the growth needed to offset the tax cuts.
State Revenue Secretary Nick Jordan said the tax cuts were bound to mean a short-term drop in state revenue. In the meantime, he said, the state has mostly exceeded the estimates upon which budget numbers were formed.
Until April, the state had been beating revenue estimates even though actual receipts were down millions from year to year.
“Our budget is built on whether we are meeting the estimates,” Jordan said, “which tells you what’s happening with the budget.”
Democrats, however, charge that the Brownback administration has been misleading the public with the way it portrays the revenue numbers.
“They’ve been intellectually phony about this stuff, and now it’s coming home to roost,” said state Sen. Tom Holland, a Baldwin City Democrat who sits on the Senate tax committee. “The governor’s team has always been scrambling to find some sort of victory they can claim.”
The Brownback administration blamed President Barack Obama’s tax policies when the state came up $93 million short of projection in April.
With questions about whether the Bush tax cuts would be extended past 2012, wealthy taxpayers cashed in stocks and took their capital gains.
The shift inflated tax revenues for one year but left less money to be taxed in the future, state officials said.
Yet there were warnings a year ago that a shift in tax revenue could occur because of the increase on capital gains taxes.
Analysts at the Rockefeller Institute cautioned that it could lead to a tax collections bubble in early 2013 that would eventually burst, something that is now seen in the softening growth of tax collections.
A similar prediction was made in the spring of 2013 in a report by the National Association of State Budget Officers. The report warned that states could see a one-time bump in tax collections as taxpayers cashed in their investments early.
In April 2013, when revenues jumped by $42 million, Kansas officials were quick to claim that economic growth was offsetting income tax cuts. A month later, they acknowledged the increase might be short-lived.
“It is important to be cautious when looking at these numbers,” Jordan said in a statement issued last May.
Joe Henchman, vice president of state projects for the conservative-leaning Tax Foundation, said Kansas should have accounted for a shift in taxpayer tendencies when the tax cuts were passed.
Last spring, he said, many states saw extra money come in because of the change in taxpayer behavior. “A lot of them didn’t do a good job of making sure everybody knew this is temporary and it’s a one-year bump,” Henchman said.
Jordan said the Revenue Department last fall anticipated a drop-off tax in collections: “We just missed how bad it was going to happen.”
Former Kansas Budget Director Duane Goossen said that the softening in tax collections should have been anticipated but that it’s hard to tell how much changing taxpayer behavior contributed to April’s revenue downturn.
Goossen, who served under both Democratic and Republican governors from 1998 to 2011, said it was highly unusual to see a large decline in revenue two weeks after fiscal analysts boosted revenue estimates by $178 million through June 2015.
“These tax cuts may be costing us more money than originally estimated,” said Goossen, now vice president for fiscal and health policy at the Kansas Health Institute. “There are a lot of questions that are raised by what happened in April. There are a lot of questions that need some answers.”
These are the 10 states that saw revenue declines in the first half of the current fiscal year, which started July 1.
Alaska 31.9 percent
Kansas 7.3 percent
New Hampshire 6.4 percent
Arizona 5.2 percent
Kentucky 2.9 percent
Oklahoma 1.9 percent
Wyoming 1.3 percent
Delaware 0.9 percent
West Virginia 0.6 percent
New York 0.1 percent
Source: Rockefeller Institute