July 16 (Bloomberg) -- Republican Governor Sam Brownback got the personal and corporate income-tax cuts he demanded to stimulate the Kansas economy. Now he and his state have to live with them.
A policy that he promised would create an economic juggernaut produced a sinkhole. A projected $27 million surplus in fiscal 2015 is all that remains of $700 million two years ago, according to budget analysts. Job growth didn’t materialize, Moody’s Investors Service cut the state’s debt rating, former Republican Party chairwoman Rochelle Chronister called Brownback’s plan “ruinous” and “crazy” and 104 members of the party yesterday endorsed his Democratic opponent.
Eliminating taxes is an article of faith among many Republicans, and few states have honored the tenet better than Tea Party-leaning Kansas. Brownback has vowed to end the income levy entirely, encouraging other governors to follow. This has put the state of 2.9 million people in the spotlight as a laboratory for shrinking government. Early reviews are rough.
“The problem is getting worse fast,” said Duane Goossen, a former Kansas budget director who served Republican and Democratic governors.
A revenue drop was assured with the tax cuts approved in 2012. Yet Kansas took in about $340 million less than forecast during the year that ended June 30. With more reductions scheduled in the $6 billion 2016 budget, the squeeze is expected to tighten.
“We’re headed for a very bad budget time,” Goossen added. “Kansas has cut its revenue stream so severely that it can’t afford the programs and level of spending that it has right now.”
The revenue plunge undermined support for Brownback, 57, a former U.S. senator and 2008 presidential candidate who breezed to election in 2010 by a 2-to-1 margin. Recent polls show his re-election race with Democratic state Representative Paul Davis is close. Real Clear Politics, a website that aggregates polls, has Davis ahead by 0.3 percentage points, a toss-up.
The tax cuts are the campaign’s main issue.
“He’s someone who obviously won’t take responsibility for his own actions and is always looking for a scapegoat,” Chronister said of Brownback. “Everything is always the fault of the federal government. I’m no fan of Barack Obama, but he didn’t do this.”
The group of Kansas Republicans that crossed party lines to endorse Davis yesterday said their decision was based on Brownback’s “reckless” tax cuts.
Brownback remains bullish, saying growth will arrive. He has promised to slash more, telling MSNBC on July 9 that he will “hit the accelerator” if re-elected in November.
“We are meeting all our obligations and paying our debts on time and in full,” Brownback said in an e-mail to Bloomberg News. “Kansans have more money in their pockets to invest in their communities and businesses and we are seeing growth across the state.”
In a 2013 speech, Brownback said he wanted to take the income tax “to zero,” joining the seven states that don’t have one, claiming it would attract jobs and spur population growth.
“Look out, Texas,” Brownback said. “Here comes Kansas!”
Paying for the cuts has been challenging. Brownback’s original plan included eliminating a mortgage deduction and preserving part of a 2010 sales-tax increase to provide a cushion. Republicans embraced only portions of the governor’s plan, effectively driving up the cost of the cuts.
“They decided not to go along with that, and over time it became clear the budget was not going to balance,” said Norton Francis, senior research association at the Urban-Brookings Tax Policy Center in Washington.
“They’re setting themselves up for annual fiscal crises,” Francis said. “The only thing that will change this is a dramatic change in the economy, like the fastest in the country.”
When Moody’s downgraded Kansas to third-highest Aa2 from Aa1 on April 30, it cited the state’s “relatively sluggish recovery compared with its peers” and tax reductions that haven’t been “fully offset by recurring spending cuts.”
Criticism of the tax cuts is unwarranted, said Grover Norquist, president of Americans for Tax Reform, the Washington group that promulgates a no-tax-increase pledge for members of Congress. Kansas is the “point of the spear,” he said.
The downgrade didn’t impede a $250 million transportation-department bond offering this week, the biggest Kansas debt deal this year. Revenue backing the securities is “insufficiently insulated from the state general operation needs” to have a rating higher than the state’s, according to Moody’s.
Yet a portion of the sale maturing in 2025 was priced to yield 2.54 percent, the same as top-rated 11-year munis, according to data compiled by Bloomberg.
“Reagan didn’t turn the country around in the first six months of tax reduction,” Norquist said. “I think we’re in fine shape.”
Personal income taxes on the state’s highest earners fell to 4.9 percent from 6.45 percent and income taxes on most small businesses were eliminated.
Tim Witsman, president of the Wichita Independent Business Association, applauded the cuts, while saying that the state should be cautious. Lawmakers should resist the temptation to raid funds supporting highway construction and infrastructure to meet everyday needs.
“I’ve never believed in what used to be the Southern state trend of low taxes and low quality,” Witsman said. “It’s a tricky tight wire.”
The policy’s effect is felt at the local level, said Edward Flentje, a professor emeritus of politics and public policy at Wichita State University.
Seventy-one of the state’s 105 counties have raised property levies at least 10 percent since 2010, Flentje said, as services formerly supported by the state have been thrust onto local governments.
“I don’t think people are uniformly buying into the notion that the tax cuts will be followed by a euphoric morning in America in Kansas,” said Randall Allen, executive director of the Kansas Association of Counties. “This whole thing has been so discredited.”
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