In 2012, Kansas Governor Sam Brownback signed a series of tax cuts for individuals and businesses. As described by Conservative Review’s Chris Pandolfo, policymakers dropped the state’s tax rates and reduced three income tax brackets to two. Income taxes on pass-through entities such as sole proprietorships and S-corp businesses were also eliminated.
The tax reductions and their successors in 2013 and 2015 made Brownback a top target for criticism. Tax cut opponents blamed the policies for the state’s deficits. According to publicly available information from the governor’s office, Kansas has technically run just one budget deficit since 2007. However, some of that is due to creative accounting common in states that are constitutionally required to have balanced budgets.
For example, a $92 million pension payment for state workers was delayed in Fiscal Year 2016. Brownback also diverted $185 million from the state’s highway fund to the state’s general fund, Reuters reported.
As of March 1, the state was projected to run a deficit of about $290 million in the 2017 fiscal year, out of a projected budget of nearly $6 billion. It’s a 4.68 percent hole that has to be filled by June.
Officially, the largest surpluses were in 2008, 2012, 2013, and 2014, while surpluses in 2015 through 2017 have been smaller.
Brownback’s latest budget report projected slim growth for both taxes and spending in the near future. The report claims that tax revenues have averaged one-third percent growth since 2014, and that spending has averaged 1.5 percent growth since 2012. The report cites Brownback’s administration as having low budget growth compared to nine predecessors.
The National Association of State Budget Officers reports that state spending went down by 2 percent in Fiscal Year 2012 and down by 3 percent in Fiscal Year 2013. It went up by 5.4 percent in Fiscal Year 2014, up by 2.9 percent in Fiscal Year 2015, and again by more than 2 percent in 2016.
Political Battles
Tax cut critics from the left and within the state’s GOP nearly caused Brownback to lose re-election in 2014. The political challenges for the governor didn’t end there; earlier this year, state House Republicans voted for tax increases. Brownback’s veto of the measure was overriden by the House and nearly overridden by the state Senate.
Brownback more recently stoked further budget controversy by vetoing Medicaid expansion in his state. According to Brownback, Medicaid expansion would ill-serve the state’s poor and was too costly.
A spokesperson for Brownback told me that the state’s budget problems arose from economic changes “that we were unable to anticipate at the time of the tax cuts.”
“The anticipated shortfall is around $350 million, though with several consecutive months of revenues exceeding estimates that has fallen to around $280 million,” Melika Willoughby said. “The decline in rural markets, primarily agriculture and oil, has driven the budget shortfall.”
Asked about the near-override backed by many Republicans, Willoughby said, “In the past primary election, several liberals were elected to the Kansas legislature under the Republican banner.”
Other Assessments
Forbes contributor Rex Sinquefield wrote in July that “due to economic turmoil felt nationwide, Kansas too has seen dips in farm incomes… a fall in commodity prices and exports, sluggish movement in oil and natural-gas markets, and declining manufacturing.”
Other analyses are more mixed. In a presentation to the National Conference of State Legislatures in July 2016, S&P Global Ratings Managing Director Robin Prunty said Kansas has an AA- rating. Prunty’s report noted that Kansas was downgraded from AA in April 2016. Its long-term status, however, improved from “Negative” to “Stable.”
Critics like National Review’s Kevin Williamson say that part of the budget problem comes from higher spending. Willoughby said the goal of the tax cuts was to increase the state’s job growth and pointed to a recent study she says proves this was accomplished.
“The Arizona State University study shows that 82% of new private sector jobs in Kansas came from pass-through entities, the very businesses targeted by the tax cuts. It also shows that Kansas gained on the nation in job growth via these entities over the first two years of the tax cuts,” she explained.
The study in question, conducted by the Arizona State University Center for the Study of Economic Liberty, was published by the Kansas Policy Institute. The authors state that criticism of the tax cuts often “fails to take into account the fact that most job growth in Kansas has been — and will continue to be — from pass-through businesses….
In fact, the 36,135 jobs created by pass-through entities in Kansas represent 82 percent of all private sector jobs created in 2013 and 2014, the latest data available from the U.S. Census Bureau, and the growth is more than three times as great after tax reform than before.”
The authors join Williamson in putting blame for budget problems on the spending, not tax, side of the equation. “Simply put, Kansas cut revenue while simultaneously increasing expenditures.”
According to Sinquefield, the benefits of the tax cuts are clear — “every year since the tax cuts were implemented, Kansas has surpassed the state record for new business formations.” Furthermore, “the Kansas unemployment rate stands at 3.7% — the lowest the state has seen since 2001 and well below the national average of 5.5%.”
Like its neighbors, Kansas has faced difficult economic circumstances — an April 2016 ranking by State Policy Reports found the state ranked in the bottom five of America’s 50 states in several key categories. But while the Center on Budget and Policy Priorities noted that the Kansas economy has grown more slowly than the national average, Sinquefield said Kansas is seeing “a positive reversal in migration of wealth between” Kansas and Missouri. Like the Arizona State researchers, Sinquefield acknowledged that more research is necessary before coming to final conclusions.
