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Kansas legislature Deficit fears could thwart tax-cut bill

  • Eagle Topeka bureau
  • Published Thursday, May 17, 2012, at 12:56 p.m.
  • Updated Tuesday, April 16, 2013, at 9:24 a.m.

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— Kansas Senate President Steve Morris said Thursday it would be difficult for the Senate to support a new alternative tax-cut bill – one Gov. Sam Brownback supports – because it could create state budget deficits.

Secretary of Revenue Nick Jordan, meanwhile, urged House Republicans to approve the alternative bill because it could drive economic growth in the state for years and isn’t expected to create budget problems.

The competing views on the new bill came at a crucial juncture in the ongoing debate about tax cuts; it is the only alternative to a bill awaiting Brownback’s signature that would slash income taxes and is expected to produce a $2 billion deficit within about five years. The House could vote on the alternative plan today.

Brownback has said he will sign the bigger tax-cut bill if an alternative doesn’t reach his desk. Asked how that affects the potential Senate debate on the alternative plan, Morris said: “The governor still has a choice that he can make.”

Analysts project the alternative plan, which includes income tax cuts for individuals, phased-in elimination of taxes on business profits and some property tax relief, would leave the state with hundreds of millions in surplus for years to come, including $356 million left over in 2018.

Those projections, however, include a forecasted savings of about $350 million from Brownback’s Medicaid reform plan.

“I’ve been in the Senate 20 years and I have yet to see a decrease in Medicaid,” Morris said. “So to count on that kind of savings for Medicaid, I think, is stretching it.”

Excluding all Medicaid savings, the tax-cut package would leave the state with a surplus through 2017. But analysis by legislative researchers shows the state could face a $128 million shortfall in 2018.

The outlook could be worse if the state were to add $74 to the per-pupil base state aid for Kansas schools, as Senate leaders have advocated. Adding that and excluding Medicaid savings would result in a $42 million deficit in 2015 that grows to $1.5 billion by 2018, according to the projections.

Morris and other moderate Senators prepared their own alterative set of tax cuts. House negotiators rejected them because they weren’t as aggressive as the bill on Brownback’s desk or as a previous agreement House and Senate negotiators made. That compromise plan died when the House, concerned that the Senate would kill it, pushed through the larger tax-cut plan. Senators said they had approved the larger cuts earlier only in order to negotiate a more responsible tax bill.

“We think that what we suggested is reasonable,” Morris said. “It would be very hard for the Senate to support something that we know is onerous.”

Growth projected

Conservatives have cast doubt on the accuracy of projecting the impact of tax cuts five years out. And the projections do not assume the tax cuts would generate any economic growth, as conservatives think they will.

Officials in the Department of Revenue prepared new projections using specialized computer software that estimate how the economy would grow under various tax-cutting scenarios. That’s often referred to as “dynamic scoring.”

Under that analysis, the alternative tax cut would generate just over 21,000 jobs beyond natural growth by 2020. The aggressive tax-cutting bill on Brownback’s desk would draw about 23,000 additional jobs, according to the analysis. The projections do not show what assumptions were included in the calculation.

Jordan told House Republicans that the software produced by Regional Economic Models Inc., called Tax-PI, is probably the most accurate way to project the potential for economic growth as a result of cutting income taxes. He said Brownback administration officials have been vetting tax-cut proposals with economists and accountants. But he acknowledged the economy is subject to a wide range of national and global events.

“You can’t predict everything down to the end,” he said.

But moderate Republicans, Democrats and some tax policy experts say the software used to generate the job creation numbers can be easily manipulated.

They don’t believe that cutting income taxes will lead to meaningful job growth and say that slashing one of the state’s top revenue sources could lead to massive cuts in state services after years of cutting back because of the recession.

Nick Johnson, vice president for state fiscal policy at the Center on Budget and Policy Priorities in Washington, D.C., said there’s no solid evidence that tax cuts lead to strong job growth. And he said that the dynamic scoring methods being used by the Brownback administration don’t take into account the negative impacts of deep cuts to state services.

“What’s on the table there is really unproven and very dramatic,” he said. “It’s as likely to do more harm than good to the state.”

Jordan said the bigger tax-cut bill on Brownback’s desk would provide the quickest burst of economic growth in the state, but he said it would require lawmakers to cut hundreds of millions from the state budget next year.

He said the alternative plan that he and Brownback prefer would also grow the economy – just not as fast.

“I really think this is a budget decision,” he said. “If you want to come in next year and face a significant budget situation – or do you want to kind of move this out over the years and kind of mitigate that.”

What’s fast enough?

House Republicans voiced a variety of views on both proposals.

“If we really believe there’s going to be an impact on the economy, why wouldn’t we want more tax relief rather than less tax relief?” asked Rep. Pete DeGraaf, R-Mulvane.

Rep. Jana Goodman. R-Leavenworth, said she’s skeptical of the economic growth projections.

“Predicting the future, if anyone could do it, they’d be really rich,” she said. “I would take this with a grain of salt.”

Rep. Owen Donohoe, R-Shawnee, said the debate between the two tax plans comes down to philosophy on tax cuts.

“Does the governor actually believe in what he’s been talking about or doesn’t he?” Donohoe said emphatically to Jordan. “The tax plan that we gave him he said was good. You sit here and say, ‘The more you can cut, the more you reduce taxes, the better we are.’ Correct? What’s the problem?”

Jordan said that’s correct. He said he can’t speak for the governor, but it’s a budget decision.

“Both plans get you to where he wants to go,” Jordan said. “It depends on how quick you want to get there and what you want to deal with in the budget to get there.”

Donohoe seemed dissatisfied.

“Why do we have to be put back to that position again when we did the job the first time? That’s my question,” he said.

Alternative plan

The new proposal would make the first $100,000 of nonwage income exempt from taxes for roughly 191,000 limited liability companies, subchapter S corporations and sole proprietorships from 2013 to 2016. That’s a little longer than previous plans. Then it would exempt the first $250,000 in 2017 before eliminating the tax in 2018.

It would collapse the state’s three-tier tax brackets to two and tax married couples at 3 percent on their first $30,000 of income. But it would phase in cuts for income beyond that: 5.5 percent in 2013 and 2014, 5.4 percent in 2015, 5.2 percent in 2016 and 5 percent in 2017. In 2018, the rate would be permanently set at 4.9 percent.

It would cut the state’s portion of the earned income tax credit that benefits low-income working families from 18 percent of the federal credit to 15 percent.

The proposal also would eliminate about 15 other tax credits, many of which are not commonly claimed.

Renters would no longer be able to claim the homestead refund, but lawmakers agreed to plow that money back into the program and boost the maximum claim for homeowners from $700 to $800.

Local governments would get a share of $45 million in state money each year after 2014 to help hold down property taxes. And six-tenths of the 1 percent sales tax increase approved in 2010 would be allowed to expire in July 2013, as called for under current law.

The tax cuts are partially paid for by eliminating severance tax exemptions for oil drillers that produce more than 150 barrels a day in new oil fields.

On Brownback’s desk

The bill would eliminate taxes on most businesses in its first year and drop individual income tax rates to 3 percent and 4.9 percent. It was projected to produce a budget deficit of more than $2 billion by 2018.

It repeals about a dozen tax credits that aren’t commonly used, and it would increase the standard deduction for heads of household from $4,500 to $9,000, reducing the need for some taxpayers to itemize deductions.

It would end severance tax exemptions for oil drillers who produce more than 50 barrels of oil per day from new oil fields.

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