Yesterday over 200 people packed a room at Wichita State University to attend a forum of Wichita-area Kansas state legislators. The meeting was chaired by Representative Steve Brunk, a Republican who represents Bel Aire and parts of far northeast Wichita.
One of the topics underlying much of the meeting was the subject of tax cuts to business. Proponents of government spending say the state has given up too much revenue by granting tax cuts.
Sometimes, in case of the business franchise tax, the state levies a tax simply for existing. This tax is being phased out over a five-year period starting in 2007. Government spending interests — including Governor Mark Parkinson — want to reinstate this tax, however.
There are sometimes disagreements as to what a “cut” means. In his opening remarks, Representative Jim Ward, a Democrat who represents parts of southeast Wichita and is also assistant minority leader, referred to a recent $95 million tax cut given to business, saying this is not a good thing to do when the state needs more tax revenue. Representative Brenda Landwehr, a Republican who represents parts of northwest Wichita, disagreed with Ward’s characterization.
The program referred to is an expansion of a program that lets companies keep their employees’ Kansas withholding taxes when new jobs are created. Proponents of these types of economic development incentives that are granted through the tax system argue that without the incentive, no jobs would be created, so there would be no new taxes to collect. Therefore, the program is without cost. They also often argue that the new jobs create other economic activity that is taxed, and this is a source of revenue for the state.
There is ample evidence, however, that these targeted economic development incentives often do not work as intended.
In answering one question, Landwehr referred to the Health Care Freedom Act. This possible amendment to the Kansas Constitution would allow Kansas to opt out of certain areas of possible federal health care legislation, such as the requirement that citizens purchase health insurance. Landwehr said that the issue goes back to what the Constitution and the Bill of Rights really say. Freedom and liberty are two key words, she said. “If government decides that they should be the one dictating to you what company your health issuance should be with, what benefits you should have or not have, we’re going to have less providers. … We need to be able to make these decisions ourselves.”
Addressing the number of uninsured in Kansas, Landwehr said that over half are the “invincibles” — young people 18 to 30 years old who choose not to purchase health insurance. Another segment are the underinsured.
On the recently-passed statewide smoking ban, Brunk read a question that asked “Why is smoking not bad for you in state-owned bars?” Brunk remarked that the questioner probably meant state-owned casinos, to the amusement of the audience. I thought to myself if the state can own casinos, why not bars? And if the state owned bars and taverns, would the smoking ban apply to them?
Rep. Landwehr criticized the smoking ban based on liberty, freedom, and property rights. She also mentioned problems with the bill regarding how the casino floor air — where smoking is allowed — would be kept separate from the air in the rest of the building. Representative Geraldine Flaharty, a Democrat who represents parts of south-central Wichita, said that the health issues of smoking overrode these issues.
Education, however, was the topic of interest to many in the audience.
Representative Joe McLeland, a Republican who represents parts of west Wichita and who is chairman of the House Education Budget Committee, said that education funding is a tough issue. He mentioned the large unencumbered fund balances in Kansas school districts, mentioning specifically that the Wichita school district has $252 million in its fund balances as of December. “Schools have a lot of money,” he said to disapproval of the large number of school spending advocates in the audience.
McLeland said that schools routinely transfer unspent money from the general fund — which can’t be carried forward to the next year — to other funds. These other funds generally fall into the category of restricted funds. Schools continually remind everyone that money in these restricted funds can’t be spent with the same degree of flexibility that money in unrestricted funds can. This is part of an effort by schools to treat restricted funds — which according to recent Wichita school district presentations are 59.5% of the district’s spending — as though they don’t exist and shouldn’t be counted as part of school spending.
McLeland said that this week he will introduce legislation that will reduce the number of funds from 27 to five and will prohibit transferring general fund dollars to restricted funds, including capital building funds.
McLeland also said that state law requires school districts to spend 65% of their budgets in the classroom. Since the state average is about 55%, McLeland said schools are not following this law.
Uniform accounting is a new law passed recently, McLeland said. With 293 school districts in the state, each reporting numbers differently, it is difficult to compare budgets.
McLeland also referred to the voluntary efficiency audits that school districts could participate in. The Derby school district is the only local school district that participated. The audit found that Derby instructional services spending was above average for its peers, but teacher salaries were below the peer average. McLeland said that the reason for this surprising finding couldn’t be determined due to the lack of standard accounting and reporting.
Representative Judy Loganbill, a Democrat who represents parts of east and southeast Wichita and who is also a Wichita school teacher, asked the rhetorical question “how often do you visit a school?” She mentioned the battle between unencumbered and encumbered funds. “Approximately 60 percent of a school’s budget must go to certain places. It has to. … What’s left over is where we get the unencumbered funds. … When you’re looking at your unencumbered funds, that’s where your salaries come from.”
She also mentioned the difficulty of determining what constitutes spending in the classroom. Things like transportation, utilities, books, materials — all are essential to schools, she said. She also mentioned the need to produce highly qualified and educated students to lead us into the next generation. She said that businesses don’t come into our state because of the employee withholding tax break discussed above, but because of quality of life issues like schools, good roads, and safe neighborhoods.
After a short break so that many of the legislators could leave to attend a funeral of a former legislator, Representative Kasha Kelley of Arkansas City gave an overview of the Kansas budget and the budget process.
A question to her referenced the large number of unemployed in Kansas. If tax breaks to business are such a good deal, why are there so many unemployed? Rep. Jim Ward expressed similar sentiment earlier. A proper answer to this question is that yes, there are large numbers of unemployed in Kansas at this time. Our unemployment rate is lower than the nation’s, however, and we should be grateful for that. Furthermore, we don’t know what our jobs situation would be if taxes on business had not been reduced. Since taxes in all forms are a drag on jobs creation, it is certain that there would be fewer jobs in Kansas if not for some tax reductions.
Also, some of the tax breaks given are quite small in relation to the state budget. In 2007, which is when the franchise tax reductions started, that tax brought in about $4.6 million. To place this number in some context, in February alone the state fell $71 million short of projected revenue.
Another questioner who identified himself as a former family business owner and a teacher for 12 years questioned the effectiveness of tax abatements and breaks on job creation.
One questioner criticized the state’s economic forecasts, calling for an honest assessment, perhaps by different company. It has been the case that over the past year or so, actual revenues have been significantly less than forecast. Brunk responded that the projections are developed by economists from state universities. It should be noted that economic forecasting is very difficult, and very few people foresaw the tremendous decline in the nation’s and state’s economies. If someone could forecast these things with certainty, they could make trades in financial markets that would generate very high returns.
Analysis
Regarding the claim that business tax cuts are costing the state too much lost revenue: The problem with this analysis is that it presumes that the government has first claim on the income of businesses — and people too, for that matter. Those who believe in the principle of self-ownership, meaning that people own themselves and the things they produce, have a problem with this attitude.
I fully agree with the critics of targeted tax breaks. The state, as do all governments, has a poor record of being able to choose which companies or class of companies should benefit from special tax treatment and subsidy. A report by the Division of Legislative Post Audit from 2008 found that “it’s difficult to accurately assess the results of economic development expenditures.” Overall, the report was skeptical of the expenditures on economic development and its ability to produce jobs.
The school spending lobby, hungry for more tax dollars, refuses to acknowledge simple facts. The existence of the unspent fund balances is vigorously disputed, even though Kansas Deputy Education Commissioner Dale Dennis has said that schools can use these funds if they want. This is contrary to school spending advocate and Kansas school board member David Dennis in his flawed Wichita Eagle op-ed.
The schools also have no explanation for why the unspent balances in the funds grow rapidly, from $74 million to $94 million over the last four years for the Wichita school district. Instead, the schools would rather be left alone and unaccountable. Hopefully some initiatives in the legislature, such as the common accounting requirements, will lead to greater transparency and accountability.
The school spending lobby must also face the fact that the Kansas state achievement tests, which show large increases in school performance, are almost certainly fraudulent, as is the case in most states. The link between the huge increase in Kansas school spending and these test scores is used as an argument not to cut schools spending.
We also saw again the school spending lobby’s claim that restricted funds don’t count, as though schools are totally hamstrung when it comes to this money.
The contentiousness in the audience between the school spending lobby and the rest of the audience should lead us to question why we turn over such an important matter to government.