TOPEKA — As this year’s legislative agenda begins to clarify itself, a trinity of issues is emerging with the potential to substantially change your life: taxes, education and the budget.
Depending on what the House and Senate do in the next few months, you may see your income taxes go down and your property taxes go up — or vice versa.
Depending on where you live, your schools could get more money — or hold steady after several years of cuts. Or maybe wind up once again in court seeking money.
Woven through it all is a state budget, a $14 billion spending plan designed to limit the government, rebuild the state’s spent-down reserves and pay off debts.
In his State of the State address last week, Gov. Sam Brownback called Kansas “a state in transition.”
But to make serious changes, he’ll need a working majority of the 125 state representatives and 40 senators in an election year.
The centerpiece of Brownback’s plan for the state’s transition is his tax proposal. For years, he and other conservatives have envied states that have no state income tax, such as Texas, Nevada and Washington.
Last year, a plan to move rapidly toward that ideal was stymied in the Legislature. It passed the conservative Republican-dominated House, but came up short in the equally Republican but more moderate Senate.
This year, Brownback is taking a more incremental approach.
His tax plan would eliminate state income taxes for businesses organized as sole proprietorships, limited liability corporations and subchapter S corporations.
Most small businesses — and some large ones — fall into those three tax categories.
The underlying idea is to direct maximum tax relief to entrepreneurs and small businesses, which Brownback and his revenue secretary, Nick Jordan, believe is the path to maximizing the number of jobs and overall prosperity in the state.
It’s a philosophy based in the teachings of Arthur Laffer, economic guru to President Reagan and principal architect of Reagan’s supply-side economics. Laffer’s famed curve is a construct theorizing that lower taxes lead to more economic growth, which brings greater prosperity to the citizenry and more money to government coffers.
Laffer consulted with the administration in crafting the plan and is scheduled to come to Topeka on Thursday to explain his theories to legislators.
For the most part, Democrats didn’t believe in supply-side economics in the 1970s and ’80s, and still don’t.
Rep. Nile Dillmore, D-Wichita, said it’s unrealistic for Brownback to promise to reduce taxes and cut spending while simultaneously improving schools and social services.
“Does the word magic appear in there? Because it should,” he remarked.
Income tax changes
For individuals, tax rates — but not necessarily tax payments — would go down.
Under Brownback’s plan, the basic tax rate would drop from a maximum 6.45 percent to 4.9 percent. The lower bracket, for income under $15,000 a year, would drop from 3.5 percent to 3 percent.
But the rate reductions would be offset to varying degrees by the abolition of numerous credits and deductions in the current tax code, including deductions such as home-mortgage interest, contributions to “529” college savings plans and charitable donations — deductions popular with middle-class taxpayers.
In an appearance before a joint House-Senate tax committee, Lt. Gov. Jeff Colyer defended eliminating the deductions and credits, many of which he said were inserted into the tax code to serve special interests.
He called the current system “a hodgepodge of dozens of credits … all cobbled together over decades.
“It has not happened overnight and it is not the ideal of where we should be,” Colyer added. “It is so important that we put money back into the pocketbooks of every Kansan. Kansans know how to better spend money than government does.”
Democrats argue that the tax plan does the opposite for the poorest working Kansans, who now get an earned income tax credit. They say, and administration officials acknowledge, that the tax cut will be a tax increase for those tax credit recipients.
The EITC is a refundable credit designed to offset the impact of Social Security and other payroll taxes and to encourage people to work in low-wage jobs instead of going on welfare.
Now, many recipients of the credit wind up with a negative tax liability and receive a refund from the government instead of making a tax payment.
In Kansas, the average refund under the program is $357, Jordan said.
Under Brownback’s plan, those refunds would go away. He and his cabinet secretaries call that “broadening the tax base,” which means some of those who get a credit back now will probably be paying something.
Brownback’s plan seeks to soften that blow by doubling the personal exemption for low-income single parents and putting $60 million of the proceeds from eliminating the earned-income credit into Medicaid and other services for the poor.
Although Democrats generally advocate for such programs, they say the Republican plan is inconsistent and unfair to the poor.
Sen. Tom Holland, D-Baldwin City, and Brownback’s opponent in the 2010 election, said Republicans appear to be advocating for limited government and more money in taxpayers’ pockets for the rich, but the opposite when it comes to poor people.
That touched off a confrontation between Holland and Jordan in a tax committee meeting Friday.
“Would you rather get a $357 check? Or would the night that you have to go to the emergency room be taken care of with Medicaid?” Jordan asked Holland. “Which would you rather do? We’re helping, I think, with programs that are targeted, efficient and accountable that will be much more helpful to them than a once-a-year check."
Replied Holland: "Well, to me, you’re taking control away from the citizen, and you’re having the government make a decision it wants.”
Taxes fund budgets.
And this week, Brownback’s budget director, Steve Anderson, outlined a spending plan that appeared tame in comparison to the ambitious agenda the governor has outlined.
It appears to hold spending more or less steady as the administration pushes for its major changes, most of which would start in 2013.
It follows Brownback’s directive of smaller government with a slight reduction in spending, no cost of living increase for state employees and a 2 percent cap on spending growth that is tied to his sweeping income tax reduction proposal.
The budget recommendation also accrues larger surpluses through 2018, when it projects a $573 million ending balance — or about 8 percent of total spending.
The biggest chunk of every year’s state budget is education. And after three years of cuts, it’s time to put something back, said Sen. Jean Schodorf, R-Wichita, chairwoman of the Senate Education Committee.
She said schools “have been good sports” about taking cuts during recessionary times, going three years without raises and learning to live within diminished means. But now, they’re struggling under the weight of inflation, especially increases in utility costs that they can’t control, she added.
She’s concerned that income tax cuts at the state could turn into property tax increases to fund schools at the local level.
“They (the public) hate property taxes more than any other taxes,” she said. “We can’t allow property taxes to go up.”
That puts her at odds with the Brownback administration, whose school proposal would freeze funding for Wichita and larger suburban districts, but allow unlimited property taxes if put to a public vote.
In addition to Wichita, the Maize, Goddard, Andover, Valley Center, Derby and Haysville schools would see no new money.
Small rural districts would get some more money under the governor’s plan; in the Wichita area, that includes Mulvane, Clearwater, Renwick and Cheney. Those four districts would get $350,000 to $700,000 more, according to a Department of Education analysis.
Joe Aistrup, a political science professor at Kansas State University and a Democrat, said Brownback’s school finance plan appears to be a throwback to the model the state used before a historic battle in 1992, when a court ordered the governor and Legislature to provide more money to poor districts that had fallen behind their richer counterparts.
The ability to raise property taxes for local schools has long been a legislative goal for affluent Johnson County communities, but smaller and poorer districts would likely find it harder to get their voters to go along.
"It’s a major change," Aistrup said. "But it really kind of takes us back to a previous era.
"(The proposal) kind of pulls back from the state’s level of responsibility that it has currently by putting more responsibility on local government. It’s a situation that I think our courts will be looking at closely."
House and Senate Democrats have drawn a line around schools and issued a proposal of their own to add money to school budgets across the state. It has little chance of passage in a Legislature where they’re outnumbered by Republicans three to one, but it does give them an issue to run on in November.
The Democratic plan calls for putting an additional $45 million into schools in the next two years. The money would come from state surplus revenue now estimated at $378 million.
After two years, excess revenue would be split 50-50 between schools and a fund for local governments to reduce property taxes.
Brownback’s administration is protecting the surplus and doesn’t intend to tap it until the ending balance is at least $465 million, a tenth of a point above the 7.5 percent reserve mandated in a 1990 law.
That law that has gone ignored for most of the past decade as lawmakers struggled with multiple economic crises, even before the big national crash started in late 2008.