No evidence Kansas business tax break is creating jobs, analyst tells legislators

There’s no hard data to support the claim that a tax exemption for business owners is spurring job growth in Kansas, a state analyst told a House committee Thursday.

The exemption – which has allowed more than 330,000 business owners and farmers to pay no income tax – is one of the more controversial features of a tax law championed by Gov. Sam Brownback that went into effect in 2013.

Supporters of the exemption, including the governor, say that it has fueled job growth.

But it is difficult to prove that the exemption directly caused new jobs. analysts from the Legislative Research Department and Department of Revenue said Thursday.

Some key lawmakers – including Senate President Susan Wagle, R-Wichita, and House Tax Chair Marvin Kleeb, R-Overland Park – want to revisit the exemption as they try to fix a budget deficit projected at more than $400 million for next year.

The governor and other Republican lawmakers don’t want to touch the exemption.

The state gained about 34,400 nonfarm jobs between January 2013, when the law went into effect, and January 2015. That growth has coincided with a national economic recovery.

Rep. Ron Ryckman Sr., R-Meade, asked for data on how many jobs had been produced by the exemption. He was told that such data doesn’t exist.

“The great question is to what extent is some of that growth what we would have had anyway or what part of it would have been stimulated as a result of the new tax law changes,” said Chris Courtwright, principal economist for Legislative Research.

“And to my knowledge I don’t think anyone has any specific numbers for you on that. What’s the causal link?” Courtwright said. “I don’t think there’s been any hard analysis.”

The data

Richard Cram, policy and research director for the Kansas Department of Revenue, said the department did an analysis showing strong job growth in the Kansas City metro area since the exemption went into effect. But “there’s no way to prove that was directly attributable to the nonwage income exemption,” he said.

Cram pointed to 8,666 new business owners filing tax returns in 2013 as evidence.

However, Rep. Tom Sawyer, D-Wichita, pressed Cram on how that compared to how many new business owners filed on average in the years before the exemption.

“Somebody has a first year every year,” he pointed out.

Cram said he would check. Two hours later he e-mailed Sawyer to say that 2013 was the first year the department could track this data because of the tax law changes.

Without anything to compare it against, the total number of new filers in 2013 is a meaningless statistic, Sawyer said. He contended that the lack of specific data was partly by design.

“Any time someone asks that question, they can tell us nothing that shows cause and effect. And I think they can’t because our (revenue) numbers are down,” Sawyer said. “Our state growth is lagging the national growth. If this was working, that wouldn’t be the case.”

Other lawmakers see evidence in the data that the business exemption is working. Rep. Kasha Kelley, R-Arkansas City, said “something is tilling the soil” and called the number of new tax filers “a salient point in this discussion.”

The business exemption has cost the state around $220 million annually since fiscal year 2014 and is projected to do so again next year, according to Legislative Research. The entire 2012 tax law – which also reduced individual income tax rates for all brackets – is projected to cost $1 billion in 2016 and has cost about $1.87 billion since 2013.

Tax revenue numbers

The Department of Revenue announced later Thursday that the state had missed tax revenue expectations in April by more than $4 million, even though it lowered those expectations 10 days ago.

The state collected about $511.5 million in tax revenue for April, about $4.4 million less than projected. The miss was fueled by corporate income tax revenue, which fell $3.3 million below expectations.

Individual income tax receipts fell $248,000 short of expectations.

Secretary of Revenue Nick Jordan said in a statement that the figures don’t fully reflect income tax receipts because the department is still processing paper returns.

The state lowered its tax revenue estimates April 20 by $87.5 million from estimates in November. The April underperformance comes on top of that.

So far, the state has collected $4.46 billion in tax revenue for the fiscal year that ends in June. It is projected to take in a total of $5.55 billion in tax revenue.

Other factors

Rep. Gene Suellentrop, R-Wichita, said the tax cuts alone shouldn’t be blamed for the state’s budget hole.

“The shortfall could equally have come from an increase in expenditures and perhaps even more so,” Suellentrop said, suggesting that lawmakers look for a combination of spending cuts and taxes to fill the hole.

Rep. Ken Corbet, R-Topeka, also voiced concern about raising taxes to fill the budget hole.

“Without this plan in place, I guess what worries me is by raising taxes do you still think it’ll make Kansas a leading place for growth and people will want to come and raise their family, retire and start a business?” Corbet said. “Because money walks … Kansas needs to be friendly to get these people to stay and come here. It concerns me that if we just keep raising taxes, the other states are going to get them.”

State spending on schools increased this year after a Kansas Supreme Court order. Medicaid and pension costs have also risen. But J.G. Scott, chief fiscal analyst for Legislative Research, said other parts of the budget have stayed flat in recent years.

Kleeb said lawmakers who supported the passage of a school funding bill earlier in the session want to keep that money intact. Since school funding makes up half the spending, that limits what lawmakers can do to balance the budget aside from raising taxes. “I don’t think we can find $100 million or $200 million of expenditure cuts,” he said.

A number of ideas are floating around the Legislature that the House and Senate tax committees will review next week, including a sales tax increase, the closing of various exemptions and a reduction in the earned income tax credit, which benefits low- and middle-income workers.

“We have a certain hole to fill in the budget, and we’re the ones that have to do it,” said Sen. Les Donovan, R-Wichita, who chairs the Senate Tax Committee. “Like it or not.”

This story was originally published April 30, 2015 at 5:08 PM with the headline "No evidence Kansas business tax break is creating jobs, analyst tells legislators."