The effort by Gov. Sam Brownback and several other Republican governors to eliminate personal state income taxes is based on an economic theory that is "extremely flawed," a new report by a non-partisan research group says.
Brownback has depended on the claims of supply-side economist Arthur Laffer that states without personal income taxes are outperforming those with state income taxes. Last year, Brownback hired Laffer for $75,000 to help draw up the governor's tax proposal.
But the Institute on Taxation and Economic Policy says income tax cuts don't appear to actually stoke state economies.
"In reality, states that levy personal income taxes, including the states with the highest top rates, have seen more economic growth per capita and less decline in their median income level over the last 10 years than the nine states that do not tax income," the ITEP report states. "Unemployment rates have been nearly identical across states with and without income taxes."
Laffer's claims are based on growth in Gross State Product, which is related to population trends, and he asserts that tax policy is behind the migration of people into low-tax states.
But ITEP says population growth in states isn't determined by tax policy. The report says the growth is more attributable to low housing prices, warm weather and high birth rates in those states.
The ITEP study looks at median family income, which shows that while income has declined in most states over the past decade, the declines have been smaller in states with income taxes. Five of the nine states without income taxes are doing worse than average in median income growth.
And ITEP says that Laffer's theory fails to take into account that some states don't choose to levy an income tax because they have an unusual economic resource, such as oil, coal or tourism.
Topeka — Realtors from across the state gathered Wednesday just outside Gov. Sam Brownback's office in the Statehouse to rally in opposition to a proposal by the governor to eliminate the homeowner mortgage interest and property tax deductions.
Brownback has said removing the deductions are needed to balance the budget and ratchet down the state personal income tax in future years.
Realtors say elimination of the deductions will hurt hundreds of thousands of Kansans and send the housing market into a tailspin.
Topeka — As legislators gather today for the start of the 2013 session, one of the main budget issues is whether to make permanent the 6.3 percent state sales tax, which under current law is set to fall to 5.7 percent on July 1.
Gov. Sam Brownback, a Republican, has talked about the possibility of extending the 6.3 percent levy as the state grapples with budget shortfalls caused by income tax cuts he signed into law.
But if he wants to do that, he may not get any help from Democrats.
In the depths of the "Great Recession," a coalition of Democrats and moderate Republicans in 2010 approved increasing the state sales tax from 5.3 percent to 6.3 percent to avoid deeper budget cuts .
Under the law, the increased rate holds for three years and then falls to 5.7 percent, with four-tenths of one cent going toward paying for transportation projects. Many of those moderate Republicans and Democrats who voted for the temporary sales tax increase were defeated at the polls.
Since Republicans hold significant majorities in the Legislature — 92-33 in the House and 32-8 in the Senate — it is possible to make the temporary sales tax permanent without Democratic votes. But that would require the votes of some Republicans who have pledged to oppose tax increases.
"There isn't any amount of political spin that the governor or those legislators who adamantly opposed the sales tax increase can put on this. If they want to extend the tax increase, it is a tax increase pure and simple," said Senate Minority Leader Anthony Hensley, D-Topeka.
Asked if Democrats might face the dilemma of cutting programs they support or voting to extend the tax, Hensley said, "Sam Brownback wants to extend the sales tax to pay for his income tax cut. Let there be no misunderstanding about this at all."
Even last year, Brownback had proposed that the state keep the 6.3 percent rate to offset income tax cuts.
He has argued that cutting income taxes does more to stimulate the economy than lowering the sales tax.
Keeping the sales tax at 6.3 percent would raise approximately $250 million for the fiscal year that starts July 1. The gap between current state spending and projected revenue for the next fiscal year is already weighing in at $700 million.
Topeka — The Kansas chapter of Americans for Prosperity wants members of the 2013 Legislature to sign a pledge that they will vote against tax increases.
So far, 25 have signed the anti-tax pledge. Here is a link to those who have: http://bit.ly/ZDIy73
But would a legislator be breaking that pledge if he or she supported extension of the 6.3 percent state sales tax rate? Under current law, that rate is set to decrease to 5.7 percent on July 1, 2013.
The answer to that question is yes, but there is a caveat. According to Jennifer Rezac, a spokeswoman for AFP-Kansas, if extending the 6.3 percent state sales tax rate "were included in legislation that has an overall net reduction in taxes, then it wouldn't be violating the pledge."
The Kansas Chamber of Commerce, which vehemently opposed the temporary sales tax increase when it was passed in 2010, now supports maintaining the rate if it means further reductions in state income taxes.
Both the Kansas Chamber and AFP have worked hard, and succeeded in many instances, in helping defeat legislators who voted for that temporary state sales tax increase, which was approved to avoid deeper cuts to schools, social services and public safety.
The tax cuts signed into law by Gov. Sam Brownback are starting to show up big time in the form of reductions in projected revenue needed to run state government. That could mean significant budget cuts ahead.
On Tuesday, state financial experts met to determine the amount of revenue available for legislators and Brownback to make budget decisions next session.
The group's revised projection of $6.17 billion for the current fiscal year is 3.8 percent less than receipts in the last fiscal year.
But the revenue estimates take a deeper hit in fiscal year 2014, when the tax cuts are fully implemented. At that point, the state is expected to collect $5.46 billion, which is nearly $1 billion less than current revenue levels.
Does that mean deep budget cuts, tax increases or a combination of the two will be needed to bridge the revenue shortfall?
Not necessarily, said Brownback's Budget Director Steve Anderson.
"We don't anticipate cuts near that amount," Anderson said.
The Brownback tax cuts will exempt the owners of 191,000 partnerships, sole proprietorships and other businesses from income taxes. The package also decreases individual income tax rates for 2013, with the top rate dropping to 4.9 percent from 6.45 percent, and increases the standard deduction.
Brownback said the cuts will grow the economy. But House Democratic Leader Paul Davis of Lawrence said the new revenue estimates are more evidence "that Gov. Brownback's tax plan has put Kansas on the path to bankruptcy. As the rest of the country inches its way out of the recession, Kansas will face yet another devastating budget deficit."
At the news conference of the Consensus Revenue Estimating Group, Anderson repeated Brownback's vow to protect public school funding, which makes up half the budget.
Mark Tallman, a lobbyist with the Kansas Association of School Boards, said he was glad to hear Anderson's comments to on school funding but he noted, "To do that you would have to make very deep cuts in other areas of the budget or find additional revenues."
But Anderson said other variables exist.
The state has a healthy ending balance currently that could be used to cover some expenses, and Brownback has said he has not ruled out proposing to make permanent the temporary sales tax increase, although Republicans and Democrats have voiced opposition to that idea.
Anderson has directed state agencies to prepare budgets that include a 10 percent cut as a contingency plan in case something happened that cratered the economy.
He said unrest in the Middle East and economic problems in Europe have to be considered. "It would be naive for us to believe that we are an island that would not be affected by a meltdown in Europe," he said.
Asked if he thought the new revenue projections indicated the tax cuts were too big, Anderson said it might have been better to spread the cuts over a longer period of time, but that he was confident the plan will work.
Raney Gilliland, director of the Kansas Legislative Research Department, said there are many economic uncertainties, and that the state is experiencing slow economic growth.
The recent drought, Gilliland said, has had a negative impact on agriculture, and oil production because of the lack of water to use in horizontal drilling.