Kansas Policy Institute

Kansas has a spending problem, not a tax problem

by Guest Author on May 24, 2013

The data could not be clearer. Kansas has higher state taxes than many states because Kansas spends a lot more than those states. Every state has public schools, highways, social services, safety net programs, etc. But some states find ways to provide those services at a much better price. They spend less and therefore tax less (and grow more).

Kansas spends 34 percent more than the states with no income tax, in both the General Fund and All State Spending. As a result, Kansas has to tax residents at much higher levels than most states.

Opponents of tax reform have tried to claim that oil and gas severance taxes in Texas make up for their lack on income tax, but that clearly isn’t true. Texas only has a $94 per-capita advantage over Kansas on severance taxes. Texas’ real advantage is that it simply doesn’t spend as much as Kansas.

Our dynamic analysis of Kansas’ 2012 tax reform showed that only a one-time reduction of $186 in General Fund per-capita spending was needed to balance the budget. Kansas could do that and still be the high-spender in the region. Instead, many legislators and the administration are trying to make up most of the budget gap by raising the sales tax and other revenue increases.

The argument is that consumption taxes are less damaging to the economy than income taxes. That’s true, but using a sales tax increase to avoid dealing with the real problem of excess spending is foisting an unnecessary tax on citizens that will damage the economy.

The House and Senate budget proposals do have some small spending reductions, and it is certainly a daunting task for legislators to lead real spending reform; they have to face unending requests for more spending and an entrenched bureaucracy that often makes it difficult for reform-minded legislators to get the information they need. And the prospect of re-election is ever-present for most.

But even this late in the session, solutions exist that would avoid a sales tax increase without arbitrary spending reductions. Our Legislator’s Guide to Delivering Better Service at a Better Price (published in February) shows how to use existing cash balances to close the budget gap and ‘buy time’ to implement thoughtful spending reforms.

Even if the current budget is balanced with a tax increase this year (which, at this writing, seems likely), the spending problem isn’t going away. There are some small spending reductions in the current plans but every plan allows overall spending to continue to increase…while further reducing income taxes in future years. Simply put, the problem only gets worse the longer it is ignored.

Tagged as: Government spending, Kansas Policy Institute, Kansas state government, Taxation

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Kansas freedom scorecard released

by Bob Weeks on May 20, 2013

To help Kansans understand how legislators vote, Kansas Policy Institute has produced the Kansas Freedom Index for 2013.

Legislative scorecards like this are important as they let citizens know how legislators have actually voted, which is sometimes different from their campaign rhetoric, and even different from their current proclamations. Generally, scorecards include a large sampling of votes, so that no single issue paints a member into a corner.

James Franko of Kansas Policy Institute joins Bob Weeks on the Joseph Ashby Show to discuss the Kansas Freedom Index. Then, Bob runs down the scores for Wichita-area legislators.

The Kansas Freedom Index, as produced by KPI this year, is important and significant because it focuses on issues of economic freedom along with education freedom, which was added this year. So far, 45 bills have been included in the scorecard, and as the legislature is still in session and has at least two important bills to pass, there may be additions to the scorecard.

This year’s index is a continuation of the construction of indexes for past years, many of which may be found at Kansas Economic Freedom Index.

In a press release KPI president Dave Trabert said “An informed citizenry is an essential element of maintaining a free society. Having a deeper understanding of how legislation impacts education freedom, economic freedom and the constitutional principles of individual liberty and limited government allows citizens to better understand the known and often unknown consequences of legislative issues.”

He added, “Our 2012 index made clear that support of economic freedom isn’t an issue of political affiliation — the highest and lowest score in the Senate were both held by Republicans. The 2013 results bear out the same as a wide range of scores exists within both parties. Too often votes come down to parochial or personal issues and the idea of freedom is left on the legislature’s cutting room floor. Hopefully, the Kansas Freedom Index can start to recalibrate citizens and legislators towards supporting the freedoms of everyday Kansans and not be driven by politics.”

The importance of economic freedom

Milton Friedman: Capitalism and Freedom

Why is economic freedom important? Here’s what Milton Friedman had to say in the opening chapter of his monumental work Capitalism and Freedom some 50 years ago:

The Relation between Economic Freedom and Political Freedom

It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem; and that any kind of political arrangements can be combined with any kind of economic arrangements. The chief contemporary manifestation of this idea is the advocacy of “democratic socialism” by many who condemn out of hand the restrictions on individual freedom imposed by “totalitarian socialism” in Russia, and who are persuaded that it is possible for a country to adopt the essential features of Russian economic arrangements and yet to ensure individual freedom through political arrangements. The thesis of this chapter is that such a view is a delusion, that there is an intimate connection between economics and politics, that only certain arrangements are possible and that, in particular, a society which is socialist cannot also be democratic, in the sense of guaranteeing individual freedom.

Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.

For more about Friedman and his thoughts on economic freedom, see Milton Friedman, the Father of Economic Freedom.

Economic freedom is the most important factor in determining the well-being of people across the world. Where economic freedom exists, countries become wealthy. In introducing the Economic Freedom of the World report, its authors write: “Economic freedom has been shown in numerous peer-reviewed studies to promote prosperity and other positive outcomes. It is a necessary condition for democratic development. It liberates people from dependence on government in a planned economy, and allows them to make their own economic and political choices.”

One of the authors of the Economic Freedom of the World report, Robert Lawson, expands on the importance of economic freedom: “The big question is: Do countries that exhibit greater degrees of economic freedom perform better than those that do not? Much scholarly research has been and continues to be done to see if the index [of economic freedom] correlates with various measures of the good society: higher incomes, economic growth, income equality, gender equality, life expectancy, and so on. While there is scholarly debate about the exact nature of these relationships, the results are uniform: measures of economic freedom relate positively with these factors.”

Tagged as: Capitalism, Economic freedom, Economics, Free markets, Joseph Ashby Show, Kansas Economic Freedom Index, Kansas legislature, Kansas Policy Institute, Kansas state government, Politics

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Governing by extortion destroys freedom

by Guest Author on May 15, 2013

By Dave Trabert, Kansas Policy Institute.

Merriam-Webster defines extortion as the “… exaction of money or property through intimidation or undue exercise of authority.” It’s illegal for individuals or corporations to engage in extortion, but some governments are increasingly using forms of extortion to exact higher taxes, make citizens more dependent upon government and ultimately, strip away economic and political freedom.

Government intimidation may not come with Soprano-like threats of violence. Some government officials may not even realize they are extorting the populous — the practice of presenting the government solution as the only option has become that commonplace. But no matter how politely or subtly phrased, the message is “give us what we want or else …” The “or else” comes in many forms.

The federal government punishes citizens with flight delays and service cuts to senior citizens while continuing to lavish taxpayer money on favored political friends and countless other examples of waste and duplication. The federal government will either get to borrow and spend as much as it wants or innocent citizens will pay the price.

Some state officials in Kansas want to extend a temporary sales tax and/or take away deductions for home mortgage interest and property taxes. They say it’s necessary to avoid massive budget deficits that would de-fund schools and services. The message is that higher taxes are the only alternative, when in fact they could choose to bring down the cost of government services and stop giving out corporate welfare in the name of economic development.

University officials in Kansas say they will raise tuition, eliminate professors, and restrict student admissions if state aid is even slightly reduced. They say nothing of reducing administrative costs that rose three times faster than inflation or using large cash reserves that accumulated from a 137 percent increase in tuition and fees over the last ten years. Give them what they want or students, parents, and staff will suffer.

Local governments routinely tell citizens that taxes must be increased to avoid police and fire layoffs, pool closings and other direct service reductions. Why not consolidate overlapping government programs and bureaucracy instead of raising taxes? Or maybe stop giving taxpayer money away to friendly developers who support the growth of government and help underwrite campaigns for public office?

Our state and nation were founded on the principles of freedom and limited government. Yet those who stand in defense of freedom are often met with ridicule. Carl Brewer, the Mayor of Wichita, recently issued a thinly veiled threat to sue a woman for asking him to recuse himself from a vote to give a $700,000 sales tax exemption to a campaign contributor (and fishing buddy). A columnist for the Hutchinson News falsely blamed those who want less government intrusion in our lives for poverty, high property taxes and other woes as opposed to following his prescription for progressive, big government solutions.

Thomas Jefferson said, “Government exists for the interests of the governed, not for the governors.” Some in our state seems to have forgotten that and are working to prove another of his maxims, “The natural progress of things is for liberty to yield and government to gain ground.”

Citizens must be persistent and vocal in reminding elected officials of the former or we shall continue to suffer the loss of liberty.

Tagged as: Carl Brewer, Corporate welfare, Cronyism, Economic development, Free markets, Freedom, Kansas Policy Institute, Liberty

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Sales tax increase isn’t necessary

by Guest Author on May 8, 2013

By Dave Trabert, Kansas Policy Institute.

What a difference a year makes. Last May, Governor Brownback signed historic tax reform legislation that would reduce state income taxes by roughly $800 million in its first full year. As the legislature returns this week, the debate is about how much of the last year’s tax reform will be wiped out. Instead of reducing the cost of government to implement tax reform this year, Governor Brownback and the Senate want to make the 6.3 percent sales tax permanent and eliminate the income tax deduction for home mortgage interest; they also propose 0.5 percent reduction in the income tax on the first $15,000 of taxable income in 2014 and a reduction in all marginal rates beginning in 2017 (after a billion dollar increase in sales taxes) with revenue growth above 4 percent being used to reduce rates thereafter and eventually eliminate income taxes.

The House plan isn’t perfect but it’s better. It allows the sales tax rate to drop to 5.7 percent as promised, proportionally reduces income tax deductions, has more spending reductions and a formula that gradually eliminates the income tax altogether, using annual revenue growth above 2 percent to buy down rates.

The goal of tax reform is to reduce the overall tax burden, not shift it. Consumption taxes are better than income taxes, but taxes will still be too high (and economic growth impaired) until we deal with the real problem of excess spending. But even some self-identified fiscal conservatives don’t want to reduce spending.

Part of their resistance is that many people equate spending less with service cuts, but that doesn’t have to be the case. Per-resident spending varies greatly across all fifty states. Yet, every state has schools, highways, social programs, etc.; some simply do so more efficiently. States with an income tax spend 44 percent more per-resident than those without an income tax. States that spend less, tax less (and grow more). Done well, states can spend less and actually deliver the same or better services.

In fact, Kansas would have spent $2.9 billion less last year if spending were at the same level as the average state without an income tax.

Our “Legislator’s Guide to Delivering Better Service at a Better Price” shows legislators how to use existing cash reserves to ‘buy time’ and implement thoughtful efficiency measures to reduce costs over time. It can be done and it can be done now.

The problem with implementing income tax reductions is one of politics, not economics. As Thomas Sowell says, “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”

Here’s hoping legislators make taxpayer-focused decisions based on sound economics when they return to Topeka this week.

A version of this appeared in the Wichita Eagle.

photo credit: 401(K) 2013 via photopin cc

Tagged as: Economics, Kansas legislature, Kansas Policy Institute, Kansas state government, Sam Brownback, Taxation

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Kansas must reform KPERS

by Bob Weeks on May 6, 2013

New research from Kansas Policy Institute reinforces what some have known but many have discounted: The Kansas Public Employee Retirement System is in poor financial shape, and it’s going to cost Kansans a lot to fix it. It is urgent that we enact substantive and meaningful reforms now, rather than later. KPI writes the following in introducing its new study Preventing Bankruptcy in the Kansas Public Employees Retirement System.

It turns out that the $9.2 billion hole found in Kansas’ public pension program will balloon under new accounting standards used by governments across the country.

Under the current standards, Kansas’ pension system (KPERS) is funded at 59.2%, 80% is a generally accepted barometer of pension health. These numbers demonstrate that Kansas has one of the worst funded pension systems in the country.

Unfortunately, the new standards will only make things worse as our funding ratio will drop to 46.1 percent under the new standards.

Each person in Kansas will have to pay $3,285 to fill our KPERS hole under the old standards and things will only get worse.

The executive summary of the study follows.

Recent evidence reveals that the Kansas Public Employees Retirement System (KPERS) is one of the most underfunded pension plans in the country (59 percent funding ratio at the end of 2011) and that there is a high probability the plan will not have sufficient funds to meet pension obligations over the next decade. This funding ratio will deteriorate further under the new accounting standards discussed below. The solution to this funding crises is to bring pension benefits into line with the costs of pension plans for individual employees. A number of states have successfully enacted structural reforms in their state pension plans to accomplish this objective, including defined contribution and hybrid plans.

Unfortunately the recent reforms enacted in KPERS creating a cash balance plan for new employees fails to accomplish that objective. This study provides a roadmap for pension reform in Kansas, the major conclusions of the study are:

1. Use the New GASB Accounting Standard

The new GASB standards to be implemented in 2013 and 2014 will require realistic actuarial assumptions and reporting. It is time for Kansas and other states too incorporate this more realistic data in transparent and timely reporting and to use this data in policy formulation.

2. Enact Structural Reforms

Using more realistic actuarial assumptions, via new GASB standards, most states, including Kansas, will find that they face a funding crises in their state and local pension plans. Kansas legislators must follow the lead of state and local governments that have successfully replaced these defined benefit pension plans with defined contribution or hybrid plans.

3. Bring Public Sector Pension Benefits In Line with Private Pension Benefits

Public sector workers receive wages and salaries equal to or greater than comparable employees in the private sector. The pension and other post employment benefits received by public sector workers are significantly above that received by private sector workers. The outcome of recent pension reforms is to bring convergence of pension benefits in the public and private sector.

4. Legal Challenges to Public Sector Pension Reform

Structural reforms enacted to solve the funding crises in state and local pension plans have been and will continue to be subject to legal challenges, and Kansas is well positioned to meet these legal challenges.

5. Bankruptcy, Not Bailouts

In Kansas there will be tremendous pressure to bailout failed state and local pension systems to avoid bankruptcy. Bailouts of pension plans create all the wrong incentives. If state and local governments cannot manage their pension plans and other financial affairs bankruptcy forces them to address these issues.

6. Launch an Education Campaign

Successful pension reform in other states such as Utah and Rhode Island has required a bi-partisan effort in the legislature and support from all the stakeholders. Generating this support for pension reform in Kansas will require an education campaign. Kansas citizens must understand that the current defined benefit pension plan is not sustainable. Solving the funding crisis in KPERS will require burden sharing by all the stakeholders, including current employees, retirees and new employees.

The full study is at Preventing Bankruptcy in the Kansas Public Employees Retirement System.

Tagged as: Bailouts, Kansas legislature, Kansas Policy Institute, Kansas state government

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Low education standards limit Kansas childrens’ dreams

by Bob Weeks on April 30, 2013

A new video from Kansas Policy Institute highlights the fact that Kansas schools have low standards. Additionally, the standards have been changed so that it appears students are doing better.

For its trouble, KPI will likely be criticized by the Kansas public school education bureaucracy and newspaper editorial writers. They will accuse KPI of branding Kansas students and teachers as failures.

But it’s not the students and teachers who set the standards. It’s the Kansas public school education bureaucracy that does that. Their constituencies — Democrats, moderate Republicans, superintendents, the teachers unions — will defend these bureaucrats.

Or is it those who look to find the truth, and advocate for the necessary reforms?

Tagged as: Education, Kansas Policy Institute, Wichita and Kansas schools

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In Wichita, community needn’t be government

by Guest Author on April 29, 2013

Kansas Policy Institute offers commentary on the Wichita/Sedgwick County Community Investment Plan.

In The Righteous Mind: Why Good People Differ on Politics and Religion, renowned psychologist Jonathan Haidt describes how the human mind is dual in nature: “We live most of our lives in the ordinary world, but we achieve our greatest joys in those brief moments of transit to the sacred world, in which we become ‘simply a part of a whole.’”

A recent survey by the City of Wichita capitalized on this innate human tendency by equating community with government. Our natural desire to become “simply a part of a whole” manifests itself in our jobs, churches, softball leagues, clubs, dinner parties and recently pride in WSU’s success in the NCAA tournament. Our citizenship in Wichita is one of many communities that define us as individuals, one of many communities we make sacrifices for, one of many communities we call upon to solve problems.

The survey respondents provide a list of wishes, all with the goal of improving our lives, many of which can and should be provided by city and county governments. Allowing businesses to openly compete to build water and street infrastructure, with competitive bidding for contracts, would strengthen the community by precluding any unfairness that weakens trust in the city.

Survey respondents showed a plea for business formation and young talent. The city could promote a sense of community by creating a welcoming culture for all businesses, one that does not pick favorites. 71.8 percent of respondents do not have faith that most people are willing to put community interests above personal interest — perhaps because so often city hall is called upon to hand out special tax treatment.

The survey also tries to identify challenges to the community; respondents were asked one question about Boeing and two questions about political divisions. Overwhelmingly respondents believe political divisions are negatively impacting our community’s ability to respond to global challenges.

We live in the biggest city in the state which brings with it many challenges; solutions to those challenges come in many forms, giving rise to the vast diversity of opinion borne out in the survey. That diversity may be trying but we should not allow the aspiration for political unity to squelch debate. Ultimately it is our ability to engage and debate these issues that unites us as a community.

Tagged as: Free markets, Government planning, Interventionism, Kansas Policy Institute, Politics, Sedgwick county government, Wichita city government

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Bonding KPERS debt is not the solution

by Bob Weeks on April 1, 2013

Burden of debt, money

The Kansas House has passed, and now the Senate Ways and Means Committee will consider HB 2403, captioned “Issuing $1,500,000,000 of pension obligation bonds to finance a portion of the unfunded actuarial liability of KPERS.”

Borrowing money to shore up the Kansas state employee pension plan is about the worst idea that could come out of Topeka. Legislatures across the country, and counties and cities of all sizes, have shown that government is fundamentally unable to manage the responsibilities of a defined benefit pension plan.

For more about the problems with KPERS, see KPERS problems must be confronted. Newspapers are not helping Kansans grasp the gravity of the problem; see KPERS editorial a disservice to Kansans. Below is a helpful explanation written by Kansas Policy Institute Adjunct Fiscal Policy Fellow Barry Poulson, Ph.D.. He is also Emeritus Professor at the University of Colorado — Boulder.

Public officials in Kansas have proposed using pension obligation bonds to solve the funding crisis in the Kansas Public Employee Pension System (KPERS). In my view this is not a solution to the funding problem and I will discuss what I perceive to be flaws in this proposal.

The rationale for using pension obligation bonds to pay off unfunded liabilities in the pension plan assumes that the state can borrow funds at a low interest rate and then earn a higher rate of return on the proceeds deposited with the pension fund. The flaw in this rationale is the assumption that KPERS will earn a higher rate of return on bond proceeds deposited in the KPERS fund. KPERS assumes an 8 percent return on assets accumulated in the fund. For a number of years, economists and actuaries have questioned this assumed rate of return and the use of this assumed rate to discount liabilities in the plan. The Government Accounting Standards Board has issued new standards, 67 and 68, to be implemented over the next two years, requiring state and local governments to use a lower interest rate, the mortgage bond rate, to discount liabilities in their financial statements.

If we assume that a lower rate of interest, such as the municipal bond rate, is the interest rate relevant in discounting unfunded liabilities in the pension plan then it is not clear that issuing pension obligation bonds will generate returns above the interest cost on those bonds. If the returns fall below the interest cost on the bonds then this introduces an additional risk and could in fact exacerbate the funding problem in KPERS.

A major flaw in the proposed issuance of pension obligation bonds is the lack of nexus between the investment of the bond proceeds and payments for unfunded liabilities in the plan. The experience in other states is that sometimes bond proceeds are earmarked for other state expenditures. The most egregious example of this problem is the state of Illinois which issued $10 billion in pension obligation bonds and then used the proceeds to meet current expenditures rather than to pay off unfunded liabilities in the pension plan.

Even if the state of Kansas would not commit this form of fraud on the taxpayers the fungible nature of state funding makes it impossible to guarantee the nexus between bond proceeds and the payment for unfunded liabilities in the pension plan. If legislators see that additional funds are available to pay off unfunded liabilities in the pension plan they may choose to allocate less general fund money to meet these pension obligations. The state has not allocated the annual required contribution (ARC) to KPERS for several decades and is not projected to do so for the foreseeable future. Legislators continue to promise pension benefits without allocating the funds required to meet these obligations. We should expect this moral hazard to be even greater with the issuance of pension obligation bonds.

Even if the proceeds of pension obligation bonds could be set aside in a lock box and earmarked to pay off unfunded liabilities in the pension plan the state must still address the accumulation of unfunded liabilities in the defined benefit plan. Without fundamental structural change, including shifting public employees to some form of defined contribution pension plan, these unfunded liabilities will continue to accumulate. Legislators should not be diverted from this difficult task by non-reforms, such as the issuance of pension obligation bonds.

Shifting the cost of pension obligations from one generation of employees and taxpayers to the next generation is not a solution to the funding crisis in KPERS. The defined benefit plan offered by KPERS is not sustainable.

I analyze the sources of unfunded liabilities in the plan and explore alternative reforms to solve this problem in an upcoming paper with KPI.

Some of my other work for KPI on KPERS is here and a legal analysis of what can, and cannot, be changed in KPERS is here; the latter piece was done by another scholar.

Tagged as: Kansas legislature, Kansas Policy Institute, Kansas state government

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Legislator’s guide to delivering better service at a better price

by Bob Weeks on March 23, 2013

From Kansas Policy Institute:

How can Kansas get to the point of lowering spending, lowering taxes, and allowing for more job creation? It is not an easy process, but “A Legislator’s Guide to Delivering Better Service at a Better Price” offers an outline. This road map from KPI was recently released and will be updated as new analysis is added and ideas are refined.

A few of the ideas from the guide:

Use the $2.5 billion held in cash reserves by state agencies to manage the process of lowering spending (Page 3).
Review discretionary spending. For instance, State agencies spent $5.8 million on Advertising in 2012 (Page 6).
Set up a privatization panel to deliver higher quality service at lower prices (Page 7).
Utilize priority-based budgeting that requires each agency to prioritize every program or service from most to least effective. Those on the bottom of the list can be considered for possible elimination and/or being scaled back (Page 7).

The report is at A Legislator’s Guide to Delivering Better Service at a Better Price: How to reduce government spending and create a better taxpayer experience.

Tagged as: Government spending, Kansas Policy Institute, Kansas state government, Privatization

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Kansas school spending excused

March 3, 2013

Kansas public school teachers and the education bureaucracy want taxpayers to trust them as a reliable source for facts about Kansas schools. But the record doesn’t inspire trust.

Tagged as: Education, Government spending, Kansas Association of School Boards, Kansas legislature, Kansas Policy Institute, KASB, Wichita and Kansas schools

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