Two years after promising his tax cuts would be an arenaline shot to the economy’s heart, Gov. Sam Brownback last week told the Wall Street Journal: “It’s like going through surgery. It takes a while to heal and get growing afterwards.” Sounds painful, and not very reassuring.
Revenues were always anticipated to drop significantly as the massive income-tax cuts took effect for 2013. What has perplexed and unnerved many is how revenues for the past two months could be so dramatically less than projected – $310 million less between April and May – given that the state’s economists just ran the numbers in April. Even if collections better match estimates going forward, Brownback’s prized $700 million reserves could dwindle to $50 million by next summer.
Administration officials have strained to blame the fall-off not on the tax cuts but on President Obama, and specifically on the impact of investors having sought in late 2012 to avoid an increase in the federal capital-gains tax related to the fiscal cliff. Some other states have seen their own year-to-year dips.
But last week the nonpartisan Kansas Legislative Research Department put some distance between it and the Brownback administration’s explanations, saying in a regular report that it appears some of the initial estimates associated with the tax law changes in 2012 and 2013 “were understated.”
Higher education leaders are said to be concerned about what this revenue trajectory will mean for their institutions. The worriers are sure to multiply. It would be one thing if taxes, once cut, could be adjusted upward as necessary. The surest urge at the Statehouse will be to cut spending somehow – never mind increasing costs and KanCare caseloads, the pending school finance lawsuit, and the strain of years of reductions across the board of state-funded services.
Meanwhile, Brownback’s re-election campaign wants to talk about other parts of the state’s fiscal picture, including new business filings and job growth along the Missouri border. But it’s on the governor, who famously warned Texas to look out for a Kansas boom, that the Bureau of Economic Analysis data released last week found the state’s 1.9 percent growth in gross domestic product in 2013 – while slightly better than the nation’s 1.8 percent rate – lagged not just Texas’ 3.7 percent but the growth in every neighboring state except Missouri.
Nor can the governor credibly discount the unflattering attention this fiscal predicament is drawing to Kansas, including the Wall Street Journal’s characterization of the tax cuts “as more of a warning than a beacon” and its quotes from state officials in Nebraska and Oklahoma about having learned from Kansas’ mistake.
Moody’s Investors Service cited “Kansas’ relatively sluggish recovery compared with its peers” and “revenue reductions resulting from tax cuts which have not been fully offset by recurring spending cuts” as among the reasons for its decision to downgrade the state’s credit rating last month.
The questions soon to be answered: Whether the fiscal cliff sell-off is “the primary cause” and “the big lug is done,” as Department of Revenue officials have put it, or whether state leaders’ faith in the stimulative power of the tax cuts was disastrously misplaced. If the tax cuts continue to be a dud, governor and lawmakers will need to not only answer for them but respond to them.