TOPEKA — Gov. Sam Brownback’s administration faced new criticism Thursday over its newly enacted state income tax reductions because state agencies have been directed to propose ways to trim their spending.
Budget Director Steve Anderson told agency directors to draft proposals for cutting spending by 10 percent for the fiscal year beginning July 2013, though the administration said aid to public schools wasn’t included.
Anderson sent his letter July 18, telling state agency directors not to draft proposals for pay raises for their employees and adding, “Reductions will have to be made.”
House Minority Leader Paul Davis, a Lawrence Democrat, said Brownback is proving that the tax cuts will come at the expense of public safety and programs for seniors and the disabled.
“The consequences of his failed priorities have only just begun,” Davis said in a statement.
Brownback spokeswoman Sherriene Jones-Sontag said Anderson is asking only for “contingency budget plans should something happen to the country and world economies that are beyond our control.”
“However, there are things agencies can do to reduce costs and streamline their offices without impacting services,” she said.
The state ended its last fiscal year on June 30 with $183 million in cash reserves, and tax revenue exceeded projections in July by $23 million.
During a Statehouse news conference Thursday, Joan Wagnon, a former secretary of revenue and current chair of the Kansas Democratic Party, said the income tax reductions will force cuts to important public services and put pressure on local governments to raise property taxes.
Eliminating income taxes on many businesses and cutting individual rates also will create an imbalance in Kansas’ tax system and put an increased burden on the poor, she said.
Wagnon pointed to several studies that dispute the notion pushed by Brownback’s administration that states with no income tax have better economic growth than those with higher taxes.
She said Brownback’s tax consultant, Arthur Laffer, cherry-picks data to try to convince state lawmakers that tax cuts are the solution to economic problems, and she said that Laffer’s philosophy has been disproved many times over.
“This tax plan is part of Laffer’s fairy tale,” she said.
Growth, or cuts?
Conservatives, including Brownback, project the income tax cuts will drive private-sector growth and create thousands of new jobs. Other Republicans and Democrats think the cuts will force the state to drastically cut important core services, including education and aid for the poor and disabled.
Martin Dickinson, a long-time University of Kansas law professor, said at the news conference that the cuts that go into effect next year will give Kansas one of the most regressive tax systems in the country because they will create low rates for wealthy people and businesses while likely forcing cuts to services that benefit the poor.
Because the bill eliminates nonwage income taxes for many business owners, it will create disparities in workplaces where bosses who make a lot of money will pay no taxes and their employees who get paid in wages will pay taxes.
On Tuesday, Laffer and Brownback appeared at a forum in Overland Park where they predicted that the tax cuts will create thousands of jobs.
Brownback gave Laffer a $75,000 contract to consult with the state on tax reform efforts earlier this year, and Laffer tried to rally support for a massive tax-cutting plan at hearings during the legislative session. The plan called for reducing individual income taxes, phasing out income taxes on businesses, and eliminating of more than a dozen tax credits and deductions, including several popular ones such as the home mortgage deduction and the earned income tax credit that benefits the working poor.
That plan failed to generate support in the House and Senate. But it was advanced to the Senate, where it was drastically altered, driving up its cost.
Several Republican senators who initially voted against the bill changed their votes on a second round of voting, approving the bill. Then when the House heard the Senate wouldn’t consider a separate negotiated plan, it advanced the bill to Brownback, who signed it.
The new rates
Starting in January, the plan will reduce individual income tax rates and eliminate income taxes for owners of about 191,000 businesses. The new law collapses state income taxes to two brackets and cuts individual rates to 3 percent for married people who file jointly with income of less than $30,000. Income beyond that will be taxed at 4.9 percent.
Legislative researchers project it will create a cumulative shortfall of more than $2.5 billion over five years.
A study by the Institute on Taxation and Economic Policy — which Laffer disputes — calls Laffer’s studies showing low-tax states outperforming others “misleading.”
Revenue Secretary Nick Jordan issued a statement saying the income tax cuts were debated extensively and that Kansas now has pro-growth tax reform that lowers rates for all Kansas families.
“While opponents of tax reform try to roll back the clock with scare tactics and their belief in bigger government, Gov. Brownback is committed to funding core government services such as education, public safety and social service, while also looking forward to job creation and economic growth,” he said. “Kansas is open for business.”
The administration also acknowledged Thursday that Kansas legislators will have to consider technical changes to the income tax reduction law. The Department of Revenue is still considering which issues must be tackled next year, spokeswoman Jeannine Koranda said.
The department already has acknowledged one flaw in the law: Some sections conflict on whether many income tax deductions are retained. But Jordan has said the agency will interpret the law as keeping them, as lawmakers intended. Koranda said it’s common for lawmakers to follow up with technical adjustments the year after complex legislation has passed.
As for a tax bill next year, she said, “It’s not an ‘if,’ but a ‘what.’ ”
Contributing: Brent Wistrom of The Eagle; Associated Press