May 9, 2014

Eagle editorial: Why were tax estimates so far off?

State officials need to provide a better explanation of why Kansas’ tax collections were down in April than “it’s Obama’s fault.”

State officials need to provide a better explanation of why Kansas’ tax collections were down in April than “it’s Obama’s fault.”

Was the drop an aberration, or is it likely to continue? How could state officials miss their estimates so badly? How much of the shortfall is attributed to federal tax policies and how much to the state income tax cuts?

State revenue collections for April came in $93 million less than estimates. Though it isn’t unusual for revenue in a given month be in a little more or less than the estimates (in March it was more), the April estimates are nearly always very close because they are made after the April 15 tax deadline.

So why were these estimates so far off?

“This is an undeniable result of President Obama’s failed economic policies of increasing taxes and overregulation,” Kansas Revenue Secretary Nick Jordan said in a press release.

Huh? When March tax collections came in higher than projected, Jordan boasted about how “we’re seeing the Kansas economic engine running.” Now Obama is to blame?

It is likely that the shortfall is related to a federal capital gains tax increase that went into effect in 2013 as part of the fiscal-cliff fight in Congress. As a result of the tax change, some people sold stock at the end of 2012 to avoid the higher rate (which resulted in higher-than-normal tax collections for the 2012 tax year and lower collections for 2013).

But given that this tax shift was widely known, why did Kansas revenue estimators so misjudge its impact?

All total, Kansas’ tax collections in April were 45 percent lower than a year ago. Nearly all of that drop was due to state income tax cuts and a partial reduction in the statewide sales tax.

Are those tax cuts costing the state more than anticipated? Are more businesses than expected no longer paying any state income taxes? Is revenue likely to keep dropping?

The talk at the Statehouse is that tax collections through the end of this fiscal year on June 30 could be more than $200 million less than estimates, and that next fiscal year might be another $100 million short. If so, that could burn through the state’s cash balances – or Gov. Sam Brownback and lawmakers may have to make budget cuts partway through next fiscal year, which would be particularly painful.

The May and June tax collections will be key in assessing whether the revenue drop was a fluke or the start of a terrible trend.

For the editorial board, Phillip Brownlee

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