First, the governor has said that tax reform is designed to be revenue neutral. That goal means that if one person pays less, someone else has to pay more. It also means that the state’s thirst for spending is not quenched. It is continued spending that prevents us from dramatically reducing or eliminating income tax rates in Kansas.
Critics of lowering income tax rates point to the advantages that states with no income tax have. Texas is often mentioned, where it is said that the state’s oil wealth and the taxes it generates make it possible for Texas to have no income tax.
There are two rebuttals to this argument. First, Kansas may have much new activity in oil and gas in the very near future. With the severance tax and taxes from other economic activity — as many as 25,000 jobs and $5 billion in investment over five years — new revenue may be flowing to the state. Brownback has called for limiting the growth of state spending to two percent annually, with revenue growth above that dedicated towards reducing income tax rates.
The second rebuttal is that states with low or no income tax generally spend much less than Kansas. Using figures I compiled for 2010, Kansas state spending per person is $4,923, which ranks it 35th among the states. Only 15 states spend more than Kansas, on a per person basis.
Texas, with no income tax, spends $3,703 per person. Florida, another state with no income tax, spends $3,300 per person.
Kansas Democrats have called for restoring school spending, and increasing it in the future. They have other plans for state spending, too. That’s why it is important that Kansas implement something that 47 states have, but Kansas does not. Unfortunately, the governor didn’t mention it in his address. That missing ingredient in the Kansas state financial plan is a rainy day fund.
Rainy day funds operate in different ways in the states that have them, but generally there are strict rules about spending the money in the fund. A rainy day fund would have helped Kansas whether a downturn in revenue without resorting to a tax increase. That’s vitally important, as once tax increases are in place, they are very difficult to remove. We have such an example of this now in Kansas: The increase in the statewide sales tax, promoted to last just three years, is now recommended to be permanent, according to the governor’s plan.
(Shifting sands: Kansas Senator Carolyn McGinn, who voted for the sales tax increase, now wants it ended a year earlier than originally planned. That was a transparent response to her having to face a conservative challenger in her primary election this year. But now she finds herself opposing the governor on this issue.)
Kansas has a requirement for a 7.5 percent ending balance in the general fund. That requirement is often waived by the legislature, as it has been for several years in a row. Rainy day fund legislation is often implemented in states’ constitutions, which can’t easily be waived or ignored by spending-happy legislature. The strict requirements as to how and when the fund balances can be spent is much different from a simple ending balance. Kansas Democrats, for example, are calling for spending the year’s ending balance.