Starting in 2013, and again this year, Kansas Gov. Sam Brownback has become something of a lightning rod in the world of Missouri politics.
Both Democrats and Republicans have referred to Brownback’s sweeping 2012 tax-cut measure in their arguments for and against a tax-cut proposal in the Show-Me State. Supporters argue the cuts are needed to remain economically competitive, while opponents say cuts threaten education and other services.
On April 16, the Missouri House of Representatives passed Senate Bill 509 to gradually cut the state’s top individual income tax rate to 5.5 percent from 6 percent and phase in a 25 percent deduction for business income reported on personal tax returns.
The reductions – which only would be implemented if state revenue exceeds the prior year – have been thought to be positively mild compared to Kansas. However, a last-minute change in the law sent Nixon on a statewide tour last week extolling the dangers of the bill he said would cost Missouri’s general fund $4.8 billion a year once fully implemented.
“This is a doomsday scenario,” Nixon said in an April 22 conference call with reporters hours before presenting the same message on Missouri State University’s campus.
Eye on KansasThe Jayhawk State is front and center since Brownback two years ago signed into law a bill reducing Kansas’ top income tax rate to 4.9 percent from 6.45 percent while immediately eliminating income tax on business profits from limited liability corporations and partnerships passed through to individuals.
Scott Drenkard, an economist with the Tax Foundation, a nonpartisan think tank in Washington, D.C., said the problem with Kansas’ tax cuts is that they weren’t paired with spending cuts.
“You have to either decrease spending or raise other revenue. Neither of those happened, so they had a true revenue hole,” Drenkard said. “Kansas is not a model for other states. It lowered the rate, but then further narrowed the income-tax base by cutting out a chunk of what the income tax is capable of raising.”
According to the Kansas Legislative Research Department, that hole would have been more than $800 million a year had the legislature not taken steps in 2013 to introduce such revenue generators as reducing itemized deductions. Following last year’s changes, which included another reduction in the top individual tax rate to 3.9 percent through 2018, the tax policy researchers at the Tax Foundation estimated Kansas’ budget gap at a more manageable $95 million to $182 million a year.
“Our primary gripe has been with the structure of the tax cut in Kansas,” Drenkard said.
In Missouri, Drenkard said SB 509 also offers targeted deductions, which he thinks create unnecessary incentives and make it harder to generate traditional tax revenues for roads and schools.
“This is a problem that contributes to the diluting of state tax codes,” Drenkard said. “This is why our tax codes look like Swiss cheese.”
However, other policy analysts say Kansas is moving its tax structure in the right direction. That’s the assessment at St. Louis-based Show-Me Institute, a free-market think tank co-founded by St. Louis businessman and conservative activist Rex Sinquefield, who is joined on the current board by Springfield businessman Louis Griesemer of Springfield Underground Inc.
Show-Me Institute analyst Patrick Ishmael supports less dependence on income tax because, compared to sales and property taxes, he said income taxes typically limit growth. But as Missouri seeks to reduce income taxes through SB 509, Ishmael said lawmakers shouldn’t focus solely on Kansas.
“Missouri is in the middle of a growth corridor,” Ishmael said, noting Texas, Oklahoma, South Dakota and Tennessee have taken steps to reduce or eliminate income taxes. “It would be unwise to see Kansas as the only cause for concern.”
During the first full year of Brownback’s tax cuts, the Kansas general fund is projected to drop 6 percent to $5.96 billion when fiscal 2014 ends June 30. Ishmael noted, however, that general revenue is beating projections. On April 17, the Kansas Legislative Research Department improved its revenue forecast for fiscal years 2014 and 2015 by $180 million, collectively.
Show-Me divisionThe divide in Missouri last year centered on House Bill 253, which called for a reduction in income tax rates and ended in Nixon’s veto. The governor said he couldn’t support SB 509, either, pointing to similar errors in drafting the law.
“In this case, it’s obvious. Legislators should have seen this,” he said last week, pointing to the bill language that reads: “The bracket for income subject to the top rate of tax shall be eliminated once the top rate of tax has been reduced to 5.5 percent.”
Currently, the roughly 80-year-old bracket system puts the top tax rate at 6 percent for those who earn more than $9,000 a year, and there are a handful of lower rates for those who earn less than $9,000 in wages.
By eliminating the top bracket, people earning between $8,000 and $9,000 a year would pay the top rate of 5.5 percent, and those earning more than $9,000 would pay no income taxes, according to the bill.
Nixon said lawmakers either made an accident by changing language late in the game, or they deliberately are subverting the state’s ability to provide basic services. Nixon asked Washington University legal professor Cheryl Block to review the bill, and she estimated without the highest tax bracket, income tax collections would shrink by 97 percent when fully implemented, at least eight fiscal years out.
In an alert emailed to Missouri Chamber of Commerce and Industry members last week, President and CEO Dan Mehan took exception to Nixon’s claims, particularly the assertion the bill would cut education funding. Mehan noted the changes would not take effect until 2017 – before the education foundation formula is fully funded, based on Nixon’s 2015 budget proposal – and only if Missouri’s net general revenue rises $150 million over the highest level across the previous three years.
“The tax breaks will not go into effect unless $750 million in additional funding comes into state revenue,” Mehan said in the email calling chamber members to action. “How can the governor say education will receive less funding, when simple math shows the opposite?”
Rep. Lincoln Hough, R-Springfield, said SB 509 – unlike Kansas’ cuts – was designed as a modest approach toward giving more money back to individuals and businesses. Hough, who voted for the legislation, said the top tax rate is supposed to be 5.5 percent once the bill is fully implemented, and it seemed like Nixon was using fellow attorneys to find flaw in the bill.
“I don’t think this in any way kills the legislation. The earliest this could become an issue is 2022. That gives us substantial time to fix any unforeseen issues in what is, in my opinion, dramatically improved legislation compared to last year’s,” Hough said.
Nixon said Republicans might criticize the governor for finding flaw in their proposal, but “they aren’t saying I’m wrong.”
Education situationBack in Kansas, state lawmakers have been at odds with educators, who have recently fought to restore K-12 funding that was hit even before revenue reductions.
Kansas legislators added $129 million in K-12 funding, dipping into reserve funds to meet funding requirements outlined in a March Kansas Supreme Court ruling that found students in poor districts were being harmed by recent cuts. However, the funds were allocated in a bill that also ended a hearing process granted to most teachers if they were fired.
Mark Peterson, a political science professor at Pittsburg State University in Pittsburg, Kan., said the strategy to improve the economy by lowering taxes is neglecting the infrastructure to support job growth.
“People warn about the rise of China. Well, how is it that China’s done so well economically? In the 1990s, it invested dramatically in infrastructure – that’s roads, as well as a communications network. Then, in the first part of the 21st century, it invested enormously in education,” he said. “That investment in people, technology and expertise is what’s fueling its growth.”
Dan Betti, a fellow political science professor at Pittsburg State, declined an interview for this story. He said tax cuts are resulting in the loss of his job next year at the school. Administrative officials could not be reached for further information.
According to PittState.edu, state cuts for higher education shrunk the school’s funding by $900,000, or 2.6 percent, in fiscal 2014.
