Taking Back Kansas

Why the Income Tax Cuts Hurt More Than They Help 

Bernie KochKansas Economic Progress Council

August 30, 2014

What grows the economy?

Economic freedom (regulations/taxes)• Reliable legal systems• The investment rate in plant and equipment, and

government infrastructure• Human capital and efficient labor• Technical innovation and improvement

What grows the economy?

Economic freedom and reliable legal systems

Freedom to produce, trade and consume any goods and services acquired without the use of force, fraud or theft. This is embodied in the rule of law, property rights and freedom of contract.

It is freedom of economic initiative.

Excessive taxes and regulation can hinder this.

What grows the economy?

The investment rate in plant and equipment and government

infrastructure

What grows the economy?

Human capital and efficient labor

What grows the economy?

Technical Innovation and improvement

Area Development site selection factors

1. Labor costs 90.8%2. Highway accessibility 90.1%3. Skilled labor availability 89.4%4. Availability advanced ICT services 85.1%5. Occupancy/construction costs

82.8%6. Energy availability and costs 81.3%7. Corporate tax rate 79.3%

Kansas Government Revenue Sources

Future Revenue Stream RestrictedKansas Income Tax Rates

2012 2013 2014 2015 2016 2017 2018Top Rate 6.45 & 6.25 4.9 4.8 4.6 4.6 4.6 3.9Bottom Rate 3.5 3.0 2.7 2.7 2.4 2.3 2.3

Pass-through Business Income Exempt From Tax

2 Percent Limit on Future Revenue Growth

2012 income tax legislation

Tax Credits Repealed•food sales tax rebates•adoption expenses•agritourism•child and dependent care expenses•child day care expenses•disabled access expenditures•environmental compliance expenditures•small employer health benefit plan contributions•certain temporary assistance to family contributors

Homestead ProgramRenters no longer eligible to participate in the Homestead Property Tax Refund program

2013 Legislature “pay-fors”

The 6.3% sales tax was due to drop to 5.7% on July 1. Instead, it became 6.15% on July 1. 

In tax year 2013, all other itemized deductions (including mortgage interest and property taxes) will be reduced by 30%. Charitable exempt.

By tax year 2017 and thereafter, itemized deductions are reduced by 50%.

States without income tax without income tax

• States without income tax usually have abundant natural resources or tourism

• States without income tax shift the burden to sales and property taxes

• States without income tax shift the burden to the poor

• States without income tax usually have many “nickel and dime” taxes

Texas •Most job growth from the oil and gas industry•High property taxes•A high tax state for capital intensive businesses (ag, manufacturing, technology)•Percentage of Population Graduated from High School: 50th

•Average SAT Combined Scores: 47th

•Percent Living Below Federal Poverty Level: 8th•Median Net Worth of Households: 44th•Tied with Mississippi for highest % of low wage jobs

South Dakota

Large concentration of financial workers

No cap on credit card interest rates

Rural areas are suffering

Alaska

2nd largest oil producing stateCollects over $7 billion a year in severance

taxes.52.6 percent of state and local revenue comes

from taxes that includes severance taxes, stock transfer taxes, estate taxes, and fees for hunting, fishing, and driver’s licenses.

Over 25 percent of the workforce works for government.

Half the land is owned by government

Wyoming

Produces 40% of U.S. coal each year

25% of workforce is government

About half the land is owned by government

Florida

• Economy based on tourism and trade

• Top travel destination in the world• 60% of the state budget based on sales tax

• Property taxes among the highest in the nation

Washington State

Relies on sales tax more than any other stateMajor employers include Boeing and MicrosoftMany additional taxes and feesCigarette tax of $30.25 per cartonTax on 8,000 identified hazardous substancesLitter tax on products which contribute to

litter (groceries)Tire fee

Nevada

Relies heavily on sales tax paid by tourists

Consistently among the highest unemployment rates in the country

State hurt the most by the Recession

Taking back Kansas

States without an income tax often have

an excessive tax burden on those with

less income

Taking back Kansas

To date, there is little or no hard evidence the Kansas economy has grown due to the income tax cuts….even the Governor’s own benchmarks!!

Indicators of the Kansas Economy

“These economic metrics will allow us to determine the state’s relative economic position as it relates to the six-state region and the nation, and to monitor in a timely manner if our policies and initiatives are having the desired economic effect.”

- Governor Sam Brownback

Included in the analysis are Arkansas, Colorado, Iowa, Missouri, Nebraska, and Oklahoma

“Indicators of the Kansas Economy”

Kansas trails in growth behind other states in the region in the following categories:

EmploymentPopulationGross domestic productPersonal incomePrivate industry wage levelPrivate establishment (business)

“Indicators of the Kansas Economy”

Private Establishment growth (one year)(Total private establishments, all employee sizes)

Kansas 0.7%6-State Region 2.6%U.S. 2.2%

“Indicators of the Kansas Economy”

Population growth (one year)  

Kansas 0.3%6-State Region 0.7%U.S. 0.7%

“Indicators of the Kansas Economy”

GDP (Gross Domestic Product) growth (one year)

Kansas 3.1%6-State Region 3.6%U.S. 4.1%

“Indicators of the Kansas Economy”

Personal Income growth (one year) 

Kansas 2.4%6-State Region 2.7%U.S. 2.1%

“Indicators of the Kansas Economy”

Per Capita Personal Income growth (one year)

 

Kansas 2.2%6-State Region 3.6%U.S. 3.4%

“Indicators of the Kansas Economy”

Building Permits (one year)(New privately owned housing units

authorized)

 Kansas 22.5%6-State Region 11.5%U.S. 15.9%

“Indicators of the Kansas Economy”

Nonfarm Employment growth (one year) 

Kansas 0.7%6-State Region 1.3%U.S. 1.7%

“Indicators of the Kansas Economy”

Private Sector Employment growth (one year)

Kansas 0.9%6-State Region 1.5%U.S. 2.1%

“Indicators of the Kansas Economy”

Private Industry Wage Levels growth (one year)

 

Kansas 0.1%6-State Region 0.3%U.S. 0.6%

Taking back Kansas

The impact on the Kansas budget

When you cut taxes, you have less money

$3,200

$3,500

$3,800

$4,100

$4,400

$4,700

$5,000

$5,300

$5,600

$5,900

$6,200

$6,500

FY2000

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013

FY2014Gov.

FY2015Gov.

Dolla

rs in

Mill

ions

Receipts

Expenditures

State General FundReceipts and Expenditures

Governor’sRecommendation

The Budget

April revenue was $92 million below estimates

May revenue was $217 million below estimates

June revenue was $28 million below estimates

July revenue was $1.6 million above estimates

The budget

Actual FY 2013 SGF receipts - $6.34 billion

Actual FY 2014 SGF receipts - $5.65 billion

A difference of $688 millionA drop of 10.8% in one year!

The budget

Lawmakers approved a budget for fiscal year 2015* that spends $326 million more than the state officially expects to take in.

“The FY 2016 budget is in very big trouble no matter what happens in FY 2015.”

- Duane Goossen Former Budget Director

Tax FoundationIt rewards certain business structures while

punishing others. There is no sound economic justification for treating these two types of business activity so dramatically differently.”

“Further, while tax reductions can have positive economic benefits, they will cost revenue and will ultimately have to be paid for either by cutting spending or increasing taxes elsewhere.”

- May, 2012

Forbes – June 1012“Kansas slashed the tax rate for the better off and

exempted huge chunks of business, farm and self-employment income from its individual income tax, while increasing the burden on some of the state’s poorest residents by eliminating a rebate they now get to offset the state’s sales tax on food.”

“When the food sales tax rebate disappears next year, Kansas will join Alabama and Mississippi as the only states that levy a tax on food and don’t in some way compensate lower income residents for the strain on their budgets.”

Moody’s downgrades Kansas bonds

As the state income tax is removed, Kansas’ revenue structure will become more dependent on excise and severance taxes and the full economic impact is unclear.

The state’s ability to maintain structural balance long-term may also depend to an increasing degree on its capacity for spending cuts.

- April 30, 2014

Taking back Kansas

Final thoughts

Kansas Economic Progress Council

Thank you!