Tag Archives: Taxation

Kansas general fund

Data and charts regarding the Kansas general fund.

“The State General Fund receives the most attention in the budget because it is the largest source of the uncommitted revenue available to the state. It is also the fund to which most general tax receipts are credited. The Legislature may spend State General Fund dollars for any governmental purpose.”1

There is a requirement that the general fund have an ending balance of at least 7.5 percent. “Legislation was enacted by the 1990 Legislature to establish minimum ending balances to ensure financial solvency and fiscal responsibility. The legislation requires an ending balance of at least 7.5 percent of total expenditures and demand transfers and requires that the Governor’s budget recommendations and the legislative-approved budget for the coming year adhere to this standard. Often the Legislature suspends this requirement and allows for lower ending balances.”2

“The budget is based on an estimate of annual receipts and the Governor’s recommendation for total expenditures over the course of a fiscal year. However, within any fiscal year, the amount of receipts to the State General Fund varies widely from month to month, and an agency may spend any or all of its appropriation at any time during the fiscal year. In particular, the state must make large expenditures early in the fiscal year for school districts, while meeting the demands for periodic Medicaid reimbursements to providers, as well as making payroll. This makes for an imbalance when compared to when much of the state’s tax revenues are received, such as income tax, mostly recorded in the final quarter of the fiscal year.”3

“Estimates for the State General Fund are developed using a consensus process that involves the Division of the Budget, the Legislative Research Department, the Department of Revenue, and consulting economists from state universities.”4

The sources of data for the following charts and tables are Kansas Budget Reports and Comparison Reports for various years. Figures for fiscal years greater than 2016 are estimates from the Kansas Division of the Budget. Click charts for larger versions.

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Notes

  1. Kansas Division of the Budget. The Governor’s Budget Report Volume 1, Fiscal Year 2018. http://budget.ks.gov/.
  2. ibid.
  3. ibid.
  4. ibid.

WichitaLiberty.TV: Kansas conventions, taxing and spending, and Wichita economic development

In this episode of WichitaLiberty.TV: Co-host Karl Peterjohn joins Bob Weeks to discuss the Kansas congressional nominating conventions, taxing and spending in Topeka, and Wichita economic development and promotion. View below, or click here to view at YouTube. Episode 139, broadcast February 19, 2017.

Shownotes

WichitaLiberty.TV: Immunizations, spending and taxing in Kansas, and getting data from Wichita

In this episode of WichitaLiberty.TV: Should Sedgwick County be in competition with the private sector? What are attitudes towards taxation and spending in Kansas? Finally, what is it like to request data from the City of Wichita? View below, or click here to view at YouTube. Episode 138, broadcast February 12, 2017.

Shownotes

Kansans say no to more taxes

A statewide poll finds little support for raising taxes as a way to balance the Kansas budget.

Kansas Policy Institute has commissioned another public opinion poll gauging the preferences of Kansans. The poll released this week asked questions about how to balance the budget in the current year and next year, raising the gasoline tax, schools, paying for Medicaid, and voting on local tax increases.

In a press release announcing poll results, KPI president Dave Trabert noted, “Once again, scientific public opinion surveys show that special interests pushing for enormous, record-setting tax increases are completely out of step with the general public. Kansans expect government and school districts to make efficient use of their tax dollars. They don’t want their income taxes or gasoline taxes increased. The question is whether legislators will listen to citizens or special interests that want higher taxes for more spending.”

The poll with the text of all questions, results, and methodology may be viewed at Results of SurveyUSA Mkt Research Study #23415.

Some may recognize a discrepancy between the results of this poll with last year’s elections for the Kansas House and Senate. Those elections have been widely interpreted as a referendum against an unpopular governor and his policies. This poll, however, finds little support for raising the taxes that the governor and legislature cut.

A possible explanation is that in elections for office, voters are selecting people to serve in office. Voters must choose candidate A or candidate B (or maybe C or D). Voters must take the entire package of positions associated with a candidate. It isn’t possible to select some positions from candidate A, and others from candidate B.

But in a poll with specific and narrow questions, voters can express their preferences with more precision.

There’s a difference between voting for politicians and voting for — or expressing preference for — specific policies and issues. When given a chance, Wichitans have often voted contrary to the wishes of the city council, city hall bureaucrats, and Wichita’s political class. Whether a special tax giveaway to a hotel, a general sales tax increase, reduction of penalties for marijuana possession, or fluoridation of water: Wichitans voted in opposition to the policies that were supported by the people they voted to place in office.

The Wichita Eagle on Kansas sales tax exemptions

The Wichita Eagle editorial board writes an editorial that gives false hope to advocates of more taxation and more spending.

Advocates of eliminating sales tax exemptions in Kansas point to the great amount of revenue that could be raised if Kansas eliminated these exemptions, given at about $6 billion per year, according to a recent Wichita Eagle editorial.1

Analysis of the nature of the exemptions and the amounts of money involved, however, leads us to realize that the additional tax revenue that could be raised is much less than spending advocates claim, unless Kansas was to adopt a severely uncompetitive, and in some cases, unproductive and harshly regressive tax policy.

The unsigned editorial notes this: “And sales tax exemptions are costing the state a fortune — about $6 billion a year.” For context, general fund spending in Kansas is about the same amount. That’s a lot of money. Further, the tone of the sentence calls for more taxation so that government can spend more. In a previous op-ed on this topic Phillip Brownlee, opinion page editor for the Eagle, wrote ” And with each added exemption, the state is losing out on more revenue — $5.9 billion this fiscal year, according to the Kansas Department of Revenue. That’s money the state could be using to cover its budget shortfalls, increase funding to public schools or further reduce its income-tax rates.” At least he mentioned reducing other tax rates. Usually advocates of closing sales tax exemptions simply want more tax money to spend.

In 2015 I looked at the nature of Kansas sales tax exemptions, using data from 2014. The numbers would be a different if I repeated the analysis today. But not different by much, and the same conclusions apply.

Kansas sales tax exemptions, simplified. Click for larger version.
Kansas sales tax exemptions, simplified. Click for larger version.
We need to look at the nature of these exemptions. I’ve prepared a simplified table based on data from the Kansas Department of Revenue.2 I simplified because there are many deductions that probably should be eliminated, but they represent relatively small amounts of money.

Some sales tax exemptions are for categories of business activity that shouldn’t be taxed, at least if we want to constrain the state to a retail sales tax only. An example is exemption 79-3606 (m), described as “Property which becomes an ingredient or component part of property or services produced or manufactured for ultimate sale at retail.” The tax that could be collected, should the state eliminate this exemption, is given as $3,083.24 million ($3,083,240,000).

But this exemption isn’t really an “exemption,” at least if the sales tax is a retail sales tax designed to be levied as the final tax on consumption. That’s because these goods aren’t being sold at retail. They’re sold to manufacturers who use them as inputs to products that, when finished, will be sold at retail. Most states don’t tax this type of sales. If Kansas decided to tax these transactions, it would place our state’s manufacturers at a severe disadvantage compared to almost all other states.

There are two other exemptions that fall in this category of inputs to production processes, totaling an estimated $632 million in lost revenue. Another similar exemption is “Machinery and equipment used directly and primarily in the manufacture, assemblage, processing, finishing, storing, warehousing or distributing of property for resale by the plant or facility.” Its value is nearly $159 million.

Together, these exemptions account for $3,874 million of the $5,900 million in total exemptions.

It’s curious that the Eagle editorial did not mention these sales tax exemptions and the disadvantage that taxing these transactions would create. The authors — Brownlee, likely — did mention how other sales taxes would affect Kansas: “For example, eliminating the exemption on legal and accounting services could put Kansas at a competitive disadvantage, as other states don’t tax those services.”

Another big-dollar exemption is “items already taxed” such as motor fuel. This is an estimated $318.90 million loss in revenue. Other exemptions are purchases made by government, or purchase made by contractors on behalf of government. These exemptions account for an estimated $624.90 million in lost revenue. If these two exemptions were eliminated, the government would be taxing itself, with no net gain.

Not taxing prescription drugs means lost revenue estimated at $96.49 million. If the state started taxing residential and agricultural use utilities, it could gain an estimated $169.98 million. These taxes, like the sales tax on food and the motor fuel tax, fall hardest on low-income families. As Kansas is one of the few states to tax food, do we want to make life even more difficult for low-income households?

Adding these exemptions comes to about $5,084 million. There are other exemptions for which we could make similar arguments for their retention. What’s left over — the exemptions that really should not exist — isn’t much at all. The entire category of “Exemptions to Charitable Organizations by Name.” amounts to $3.05 million in exempted sales tax. These represent the organizations where a lawmaker has crafted an exemption like “Property and services purchased by Jazz in the Woods and sales made by or on behalf of such organization.”

So when the Eagle editorial board writes “As is, favored groups are saving billions of dollars a year, worsening the tax burden for everybody else,” It must be including broad categories of business like “all Kansas manufacturing companies” as a “favored group.” Or maybe he means prescription drug users are a “favored group.” Or families struggling to pay utility bills.

But there are more problems. The Eagle editorial board writes these sales tax exemptions are “costing the state a fortune.” The only way this makes sense is if one thinks that our property (our money) first belongs to the state, and that in order to spend it, we have to give the state its cut. That’s an opinion that you may agree with, or you may oppose. What’s remarkable — shocking, really — is that in his previous career Brownlee — the opinion page editor — was a Certified Public Accountant. He ought to understand the nature of sales taxes meant to be applied to retail sales, not components of manufactured goods.


Notes

  1. Eagle Editorial Board. Reduce sales-tax exemptions. Wichita Eagle, February 3, 2017. http://www.kansas.com/opinion/editorials/article130438759.html.
  2. Kansas Department of Revenue. Annual Reports. http://www.ksrevenue.org/annualreport.html.

Analysis of proposed tax changes in Kansas

Proposed changes in the Kansas motor fuel tax and sales tax on groceries affects households in different ways.

As part of a revision to the tax regime in Kansas, a bill proposes to raise the motor fuel tax and reduce the sales tax on most types of groceries. (Restaurant meals would not be affected.) The bill is HB 2237.1 It implements most or all of the elements of a plan called “The Path Forward.”2

Excise taxes (the motor fuel tax) and sales taxes are usually regressive, meaning that their impact is felt most severely by lower-income households.3 Data shows that as income rises, so too does spending on motor fuel and food at home. But the rise in spending is not proportional to income. For example, data from BLS (see below for references) tells us that households in the lowest quintile of income spent an average of $939 per year on motor fuel and oil in 2015. For the highest quintile of households, spending was $3,226.

But when we look at this spending as a percent of household income after taxes, for the lowest quintile spending on motor fuel and oil represents 8.2 percent of income. For the highest quintile, it is 2.3 percent. A similar pattern holds for purchases of food for home consumption.

Because of this relationship, taxes on the sale of gasoline and food affect lower-income households proportionally more. What I have done is to estimate the additional cost, as a percent of after-tax income, of the proposed motor fuel tax. As can be seen in the nearby chart, the additional cost ranges from 0.39 percent of income for the lowest-income households to 0.11 percent for upper-income households. This difference, a factor of 3.5, illustrates the regressive nature of sales taxes, and the gasoline tax is just that — a sales tax.

HB 2237 Additional Tax Cost as Percent of Income After Taxes. Click for larger.
The bill proposing the increase in gasoline tax also proposes a reduction in the food sales tax rate from 6.5 percent to five percent. That tax is also regressive. In 2014, as Wichita was considering adding one cent per dollar to the sales tax already paid, my analysis of spending found this: “The lowest income class of families experience an increase nearly four times the magnitude as do the highest income families, as a percentage of after-tax income. This is the regressive nature of sales taxes illustrated in numbers.”4

HB 2237 Sales Tax Savings as Percent of Income After Taxes. Click for larger.
A nearby chart shows that the savings from the proposed lower food sales tax ranges from 0.07 percent for high-income households to 0.33 percent for low-income households. This is consistent with the regressive nature of sales taxes: They affect low-income households greatest — when raised, and also when lowered.

HB 2237 Net Cost as Percent of Income After Taxes. Click for larger.
Another chart shows the summative effect of the higher fuel tax and lower food sales tax. Of interest, the net effect is highest for the middle 20 percent of households. Note that considering these two taxes, the effect of the proposed bill is to raise taxes for everyone.

Show the math

The Bureau of Labor Statistics, a unit of the U.S. Department of Labor,5 has data for household expenditures on gasoline and oil. This data is available for five intervals, or quintiles, of income.6

Then the U.S. Energy Information Administration, the statistical and analytical agency within the U.S. Department of Energy,7 has gasoline prices. It doesn’t have them for Kansas, but it does for the Midwest.8

From these two values, we can calculate the number of gallons of gasoline purchased for each income level. Here, we lose a bit of validity, as the BLS data is for purchases of gasoline and oil. But it’s the data we have, and purchases of gasoline surely dominate purchases of motor oil.

Once we have the number of gallons of gasoline purchased, we multiply by the proposed eleven cents per gallon additional tax. This produces the extra gasoline sales tax cost per household. This is a static calculation and assumes no change in the number of gallons purchased due to the higher cost from the tax, or from any change in gasoline prices for any reason.

Then, the BLS Consumer Expenditure Survey also holds income after taxes for the five income levels. Simple division gives us the percent of household income that the additional tax represents.

The BLS Consumer Expenditure Survey also holds data for spending on food at home for the five income levels. From that, we can multiply by 1.5 percent to estimate the amount saved if sales tax on food falls to five percent from 6.5 percent. As with purchases of gasoline, this is a static calculation and assumes no change in behavior from reduced sales tax on groceries. Simple division gives us the percent of household income that the tax savings represents.

Then, we can subtract the food sales tax savings from the additional gasoline tax costs to produce a net calculation.


Notes

  1. Kansas House of Representatives, Committee on Taxation. HB 2237, Concerning taxation; relating to income tax, rates, determination of income, tax credits; motor fuels tax, rates, trip permits, distribution; sales and compensating use tax, food and food ingredients. http://www.kslegislature.org/li/b2017_18/measures/hb2237/.
  2. Riseupkansas.org. *The Path Forward.” http://riseupkansas.org/the-path-forward/.
  3. “A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.” Wikipedia. Regressive tax. https://en.wikipedia.org/wiki/Regressive_tax.
  4. Weeks, Bob. Wichita sales tax hike would hit low income families hardest. https://wichitaliberty.org/wichita-government/wichita-sales-tax-hike-hit-low-income-families-hardest/.
  5. Bureau of Labor Statistics. About BLS. https://www.bls.gov/bls/infohome.htm.
  6. Bureau of Labor Statistics. Consumer Expenditure Survey. https://www.bls.gov/cex/.
  7. Energy Information Administration. Mission and Overview. http://www.eia.gov/about/mission_overview.php.
  8. Energy Information Administration. Midwest Regular All Formulations Retail Gasoline Prices (Dollars per Gallon). http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EMM_EPMR_PTE_R20_DPG&f=A.

Spending on roads in Kansas

A look at actual spending on Kansas highways, apart from transfers.

Spending on major road programs in Kansas. Click for larger.
When we look at actual spending on Kansas roads and highways, we see something different from what is commonly portrayed. Kansas Department of Transportation publishes a Comprehensive Annual Financial Report that details spending in four categories. These figures represent actual spending on roads and highways, independent of transfers to or from the highway fund.

  • Spending on “Preservation” has been rising, but fell last year.
  • Spending on “Expansion and Enhancement” has been rising.
  • Spending on “Maintenance” has been level, with a small decline.
  • Spending on “Modernization” has declined, then rose.

Total spending on major road programs in Kansas. Click for larger.
For these four categories — which represent the major share of KDOT spending on roads — spending in fiscal 2016 totaled $857.133 million. That’s down from $932.666 million the year before, and up from a low of $698.770 million in fiscal 2010.

Again, these are dollars actually spent on highway programs. A common characterization of the way Kansas government is funded is called “robbing the bank of KDOT.” To the extent that characterization is accurate, there is a separate line item titled “Distributions to other state funds” that holds these values. It appears in the nearby table.

Sales tax revenue to the highway fund

Transfers from sales tax to Kansas highway fund. Click for larger.
Kansas law specifies how much sales tax revenue is transferred to the highway fund. Here are recent rates of transfer and dates they became effective:1

July 1, 2010: 11.427%
July 1, 2011: 11.26%
July 1, 2012: 11.233%
July 1, 2013: 17.073%
July 1, 2015: 16.226%
July 1, 2016 and thereafter: 16.154%

A nearby chart shows the dollar amounts transferred to the highway fund from sales tax revenue. In 2006 the transfer was $98.914 million, and by 2016 it had grown to $517.698 million.

Kansas Department of Transportation Spending. Click for larger.


Notes

  1. Kansas Statutes Annotated 79-3620.

Understanding job growth and the Kansas tax reforms

Commissioned by Kansas Policy Institute and written by researchers from Arizona State University, a new report looks at the Kansas economy after the tax reforms passed in 2012.

The full report is available to read at A thousand flowers blooming: Understanding job growth and the Kansas tax reforms. Following, material from its executive summary:

Much of the discussion over economic growth following the 2012 Kansas tax reforms were enacted is misguided, hobbled by a misunderstanding of what the tax cuts were trying to accomplish and reliance on incomplete data. Additionally, it fails to take into account the fact that most job growth in Kansas has been — and will continue to be — from pass-through businesses (i.e., sole proprietorships, S-corporations, limited liability corporations, and joint partnerships). In fact, the 36,135 jobs created by pass-through entities in Kansas represent 82 percent of all private sector jobs created in 2013 and 2014, the latest data available from the U.S. Census Bureau, and the growth is more than three times as great after tax reform than before.

Using this Census data and other appropriate private sector data our analysis indicates that the impact of the tax reforms has been positive. Kansas comes out on top or at least shows strong growth in almost every relevant state comparison of the most comprehensive private sector job growth metrics. Kansas also matches up with other states well even when the less-comprehensive data often used to make comparisons is adjusted for the size of the state.

It is also important to consider the source of job creation data, the structure of a state’s economic make-up, and a state’s population when comparing job numbers. In short, just as it would not be appropriate to compare student achievement for the Kansas City and Blue Valley school districts for obvious demographic differences, it is not appropriate to compare certain states just because of geographic proximity. The monthly employment numbers from the Bureau of Labor Statistics (BLS) use a different methodology to count employment than does a more comprehensive, but less frequent, analysis from the Bureau of Economic Analysis (BEA). For instance, the BLS data estimates that in 2015, Kansas had an employed private-sector workforce of nearly 1.4 million, while the BEA data puts it at 1.9 million. So while the BLS data warrants monthly media coverage this paper puts more emphasis on the BEA analysis as it better captures those employed by proprietorships and in farm employment.

This study also uses new data from the Kansas Department of Revenue (KDOR) to clearly demonstrate that tax evasion or strategic corporate tax planning has not been widespread. KDOR records also make clear that the total value of the Kansas tax reforms from 2012 was primarily driven by lowering the income tax burden on individual wage earners. This is yet another overlooked aspect of the tax cut, as 71 percent of the overall tax relief went to individual taxpayers and 29 percent went to pass-through businesses through the income tax exemption. A final data point from KDOR also makes clear who is benefitting from the pass-through exemption. Median family income in Kansas is around $52,000 and 88 percent of the filers in 2014 with business income had Kansas adjusted gross income that year of less than $50,000.

While there is still more analysis to be done and more data to be released over the coming years, we believe the preliminary signs indicate that the Kansas tax reforms have had and, more importantly, will continue to have a positive impact on state job growth.

Image credit: Flazingo.com.

Benefits of tax cuts without raising debt

Benefits of Tax Cuts Without Raising Debt
President-elect Donald Trump should learn from Kansas’s mistake on income-tax reduction — don’t reduce revenue and increase spending.

By Dave Trabert, Kansas Policy Institute

President-elect Donald Trump should learn from Kansas’s mistake on income-tax reduction: Don’t reduce revenue and increase spending. That’s the real problem with the Kansas budget (“Brownback Sees Kansas Tax Plan as Model for Nation,” U.S. News, Dec 24). There was never an expectation that spending wouldn’t have to be adjusted to accommodate revenue reductions, but Democrats and many Republicans refused to make government more efficient so spending and taxes were increased in 2013 and again in 2015. Kansas spent 27% more per resident in 2015 than the states without an income tax.

The income-tax exemption on pass-through income for proprietorships, partnerships, Sub-S corporations and LLCs is paying real dividends. U.S. Census data show that pass-through businesses actually created the majority of new jobs in 2013 and 2014 (the most recent data for employment by legal organization). And while Kansas continues its decades-long tradition of trailing the national average on job growth, Kansas is performing closer to the average since taxes were reduced.

Census data also show employment for pass-through entities is almost at parity with C corporations in the U.S., and cutting the corporate income tax affects only about half of the business employment base. Pass-through business profits are taxable to the individual owners, so individual rates must also be reduced to really help the economy.

Dave Trabert
President
Kansas Policy Institute
Overland Park, Kan.

(Originally published in the Wall Street Journal at http://www.wsj.com/articles/benefits-of-tax-cuts-without-raising-debt-1484002119.)

The plan to raise your taxes that can’t be found

A coalition of Kansas advocacy groups wants to raise your taxes, but the plan is difficult to find.

On Wednesday a coalition of groups presented their plan to balance the Kansas budget and provide more tax revenue to spend. But — this plan can’t be found at any of the participating groups’ websites. So as a service to these groups, (Kansas Center for Economic Growth, Kansas Action for Children, Kansas Contractors Association, Kansas Organization of State Employees, and Kansas-National Education Association) I present a scanned version of the plan. Maybe one of the groups will send me a digital original.

Click here to view the plan.

Economic development incentives at the margin

The evaluation of economic development incentives in Wichita and Kansas requires thinking at the margin, not the entirety.

When considering the effect of economic development incentives, cities like Wichita use a benefit-cost analysis to determine whether the incentive is in the best interests of the city. The analysis usually also considers the county, state, and school districts (although these jurisdictions have no say over whether the incentive is granted, with a few exceptions). The idea is that by paying money now or forgiving future taxes, the city gains even more in increased tax collections. This is then pitched as a good deal for taxpayers: The city gets more jobs (usually) and a “profit,” too.

Economic activity usually generates tax revenue that flows to governmental agencies. When people work, they pay income taxes. When they make purchases, they pay sales taxes. When they buy existing property or create new property, they pay property taxes. This happens whether or not the economic activity is a result of government incentives. This is a key point that deserves more exploration.

Government often claims that without an incentive provided by government, a company would not have located in Wichita. Or, without the incentive, it would not have expanded in Wichita. Now, the city says incentives are necessary to persuade companies to consider remaining in Wichita rather than moving somewhere else.1

But there are a few problems with the arguments that cities, states, and their economic development agencies promote. One is that the increase in tax revenue happens regardless of whether the company has received incentives. Therefore, the benefit-cost ratio calculations are valid only if incentives were absolutely necessary. Otherwise, government claims credit for something that was going to happen anyway. This is a big question that deserves exploration.

For example, what about all the companies that locate to Wichita, or expand in Wichita, or simply remain in Wichita without receiving incentives? How do we calculate the benefit-cost ratio when a company receives no incentives? The answer is it can’t be calculated, as there is no government cost, so the divisor in the equation is zero. Instead, there is only benefit.

Then, we don’t often ask why some companies need incentives, and others do not. Do the companies that receive incentives really need them? Is it really true that a business investment is not feasible without subsidy? Why do some companies receive incentives multiple times while others thrive without incentives?

We may never know

We may never know the answer to these questions. Here’s why. Suppose fictional company XYZ Enterprises, Inc. dangles the idea of moving from Wichita to some other city. XYZ cites incentive packages offered by other cities. Wichita and the state then come up with millions in incentives, and XYZ decides to remain in Wichita. Question: Were the incentives necessary? Was the threat to move genuine? If XYZ admits the threat was not real, then it has falsely held Wichita and Kansas hostage for incentives. If the city or state admits the threat was not real, then citizens wonder why government gave away so much.2

So we’ll never really know. Everyone involved has incentive to maintain the fiction and avoid letting the truth leak out.

A small lever moves big boulders, they say

Related is that jurisdictions may grant relatively small incentives and then take credit for the entire deal. I’ve been told that when economic development agencies learn of a company moving to an area or expanding their Wichita operations, they swoop in with small incentives and take credit for the entire deal. The agency is then able to point to a small incentive and take credit for the entire deal. As you can imagine, it’s difficult to get the involved parties to speak on the record about this.

Further, governments may not credit the contribution of other governments. In the past when the Wichita economic development office presented information about an incentive it proposed to offer to a company, it would sometimes list the incentives the company is receiving from other governments. As an example, when the city offered incentives to NetApp in 2012, the city’s contribution was given as a maximum of $418,000. The agenda material mentioned — obliquely — that the State of Kansas was involved in the incentive package. Inquiry to the Kansas Department of Commerce revealed that the state had promoted incentives worth $35,160,017 to NetApp.3 Wichita’s incentive contribution is just 1.2 percent of what the state offered, which makes us wonder if the Wichita incentive was truly needed. Nonetheless, Wichita city officials spoke as though the city alone was responsible for NetApp’s decision.

The importance of marginal thinking

When evaluating economic development incentives, we often fail to properly evaluate the marginal gains. Here’s an example of the importance of looking at marginal gains rather than the whole. In 2012, the City of Wichita developed a program called New HOME (New Home Ownership Made Easy). The crux of the program is to rebate Wichita city property taxes for five years to those who buy newly-built homes in certain neighborhoods under certain conditions.

Wichita City HallThe important question is how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program. According to data compiled by Wichita Area Builders Association and the WSU Center for Economic Development and Business Research — this is the data that was current at the time the Wichita city council made its decision to authorize the program — in 2011 462 new homes were started in the City of Wichita. The HOME program contemplated subsidizing 1,000 homes in a period of 22 months. That’s a rate of 545 homes per year — not much more than the present rate of 462 per year. But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.

What we’re talking about is possibly inducing a small amount of additional activity over what would happen naturally and organically. But we have to subsidize a very large number of houses in order to achieve that. The lesson is that we need to evaluate the costs of this program based on the marginal activity it may induce, not all activity.

For more, see Wichita new home tax rebate program: The analysis.


Notes

  1. “But the Hawker Beechcraft deal is different, focused on saving existing jobs, not creating new jobs, and the result diverts millions in limited taxpayer funds, primarily state income tax revenues, from state coffers to a company’s benefit, simply to have an existing business stay put.” Flentje, Edward. Brinkmanship with jobs. https://wichitaliberty.org/economics/brinkmanship-with-jobs/.
  2. For more on this, see LeRoy, Greg. The Great American Jobs Scam. Especially chapter two, titled Site Location 101: How Companies Decide Where to Expand or Relocate. The entire book may be read online at http://www.greatamericanjobsscam.com/pages/preview-book.html. A relevant excerpt: “These prisoners’ dilemma games also enable companies to create fictions about cause and effect. These fictions can be used to create public versions of how deals happened that no one can credibly contradict, because the company’s real decision-making process will never be revealed. The most important fiction to maintain, of course, is that subsidies matter in deciding where a company expands or relocates. For example, being able to send secret signals to competing cities means companies can tell contradictory stories to different cities and have no fear of being exposed. If a company really has its heart set on City A, it can tell that city that it is in the hunt, but needs to do better. Meanwhile, it can send less urgent signals to Cities B and C, even if they offered bigger packages at first. Eventually, City A offers the biggest package, and the company announces its decision to go there.”
  3. Weeks, Bob. NetApp economic development incentives: all of them. https://wichitaliberty.org/wichita-government/netapp-economic-development-incentives-all-of-them/.

Wichita to grant property and sales tax relief

Several large employers in Wichita ask to avoid paying millions in taxes, which increases the cost of government for everyone else, including young companies struggling to break through.

This week the Wichita City Council will hold public hearings concerning the issuance of Industrial Revenue Bonds to Spirit AeroSystems, Inc and other companies.1 In the IRB program, government is not lending money, and Wichita taxpayers are not at risk if the bonds are not repaid. In fact, in the case of Spirit, the applicant company plans to purchase the bonds itself, according to city documents. Instead, the purpose of the IRB process is to allow Spirit to escape paying property taxes and, often, sales taxes.

These bonds will allow Spirit to avoid paying property taxes on taxable property purchased with bond proceeds for a period of five years. The abatement may then be extended for another five years. Usually these IRB issues also carry a sales tax exemption, but the agenda packet for this item does not mention such

City documents state that the property tax abatement will be shared among the taxing jurisdictions in these estimated amounts:

City: $424,918
State: $19,500
County: $381,979
USD 259: $731,614

The listing of USD 259, the Wichita public school district, is likely a mistake by the city, as the Spirit properties lie in the Derby school district. This is evident below.

The forgiveness of taxes is justified by the city because it believes it will receive a return that is greater than the foregone taxes. This benefit-cost ratio is calculated by the Center for Economic Development and Business Research (CEDBR) at Wichita State University based on data supplied by the applicant company and the city. The rationale behind these calculations is a matter of debate. Even if valid, calculating the ratio with any degree of precision is folly, reminding us of the old saw “Economists use a decimal point to remind us they have a sense of humor.”

City of Wichita: 5.38 to 1
City General Fund: 2.60 to 1
City Debt Service Fund: NA to 1
Sedgwick County: 2.69 to 1
U.S.D. 260: 1.16 to 1
State of Kansas: 5.51 to 1

These figures reveal that the City of Wichita is forcing a decision on a neighboring jurisdiction that it would not accept for itself, unless it uses one of many exceptions or loopholes. This adverse decision is forced upon the Derby School District. It faces a benefit-cost ratio of 1.16 to 1, which is below the city’s standard of 1.30 to 1, unless an exception is cited. 2 The Derby School District is not involved in this action and has no ability to influence the issuance of these bonds, should it desire to.

We have to wonder why the City of Wichita imposes upon the Derby school district an economic development incentive that costs the Derby schools $731,614 per year, with a substandard payoff?
Of note, the Derby school district extends into Wichita, including parts of city council districts 2 and 3. These districts are represented by Pete Meitzner and James Clendenin, respectively.

In a second agenda item, the city will consider IRBs for a building being developed by Air Capital Flight Line. The beneficiary, however, is Spirit, as city documents state: “The requested sales tax exemption and property tax abatement will be passed on as a benefit to Spirit.”

The annual benefit in tax savings is given by the city as:

City: $294,174
State: $13,500
County: $264,447
USD 259: $506,502

These values are offset by a Payment-In-Lieu-Of-Taxes (PILOT) estimated at $13,251 annually.

For benefit-cost ratios, the city supplies these:

City of Wichita: 3.65 to 1
City of Wichita Gen Fund: 1.83 to 1
City of Wichita Debt Serv: NA to 1
Sedgwick County: 2.09 to 1
USD 260: 1.00 to 1
State of Kansas 2.48: to 1

Here we see the same mistake with the Wichita and Derby school districts. We also see the Derby school district giving up $506,502 in tax revenue, with no positive return.

Spirit is not the only company asking for tax relief through IRBs this week. Three other companies are making similar requests. In none of these cases is economic necessity cited as a reason for escaping taxes. None are threatening to leave Wichita if the relief is not granted.

The problem with these actions

Part of the cost of these companies’ investment, along with the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. But we can’t identify which firms will be successful. So we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. The action the Wichita city council is considering this week works against entrepreneurial firms. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

A major reason why these tax abatements are harmful to the Wichita economy is its strangling effect on entrepreneurship and young companies. As these companies and others escape paying taxes, others have to pay. This increases the burden of the cost of government on everyone else — in particular on the companies we need to nurture.

There’s plenty of evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by these actions, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive. Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by government that shapes the future direction of the Wichita economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form. Young entrepreneurial companies are particularly vulnerable.

Embracing Dynamism: The Next Phase in Kansas Economic Development PolicyProfessor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.'”

(For a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view, see Research on economic development incentives. A sample finding is “General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).”)

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates for everyone is an example of such a policy. Abating taxes for specific companies through programs like the Wichita city council is considering this week is an example of precisely the wrong policy.

In explaining the importance of dynamism, Hall wrote: “Generally speaking, dynamism represents persistent, annual change in about one-third of Kansas jobs. Job creation may be a key goal of economic development policy but job creation is a residual economic outcome of business dynamism. The policy challenge centers on promoting dynamism by establishing a business environment that induces business birth and expansion without bias related to the size or type of business.”

We need to move away from economic development based on this active investor approach, especially the policies that prop up our established companies to the detriment of dynamism. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

Small business

This year American City Business Journals presented the results of a study of small business vitality in cities. 3 Wichita ranked at number 104 out of 106 cities studied. Awarding incentives to large companies places small business at a disadvantage. Not only must small business pay for the cost of government that incentivized companies avoid, small companies must also compete with subsidized companies for inputs such as capital and labor.

Pursuing large companies

Research has found that the pursuit of large companies doesn’t produce the desired growth: “The results show that large firms fail to produce significant net benefits for their host communities, calling into question the high-stakes bidding war over jobs and investment.” 4

This finding is counterintuitive. People can easily see the large companies. They are likely to know someone that works there. But it is the unseen effects that must be considered too, and that is rarely done.


Notes

  1. City of Wichita. City Council agenda packet for December 6, 2016.
  2. Sedgwick County/City of Wichita Economic Development Policy. Available at www.wichita.gov/Government/Departments/Economic/EconomicDevelopmentDocuments/City%20of%20Wichita%20Economic%20Development%20Policy.pdf.
  3. Wichita Business Journal. The State of Small Business: Wichita scores low in small biz vitality. Available at www.bizjournals.com/wichita/print-edition/2016/04/29/the-state-of-small-business-wichita-scores-low-in.html.
  4. William F. Fox and Matthew N. Murray, “Do Economic Effects Justify the Use of Fiscal Incentives?” Southern Economic Journal, Vol. 71, No. 1, 2004, p. 79.

Beware of government arts spending

Art is too important to be dependent on politicians and injecting politics into anything inevitably tarnishes it, writes Lawrence W. Reed of Foundation for Economic Education.

Economist Lawrence W. Reed is president of the Foundation for Economic Education in Atlanta, Georgia. He is the author of the forthcoming book, Real Heroes: Inspiring True Stories of Courage, Character and Conviction. Follow on Twitter and Like on Facebook.

While in Wichita Reed appeared on WichitaLiberty.TV in this episode. An abridged version of the following appeared in the Wichita Eagle.

Beware of Government Arts Spending
By Lawrence W. Reed

While visiting Wichita in October, I learned that city government subsidies for the arts is a local, contentious issue. I’d like to offer a perspective: Don’t do it. Art is too important to be dependent on politicians and injecting politics into anything inevitably tarnishes it.

Proponents of art subsidies argue that because a large majority of people enjoy art and even personally engage in it, it’s therefore a government responsibility. But even larger majorities of people enjoy things like clothing, pets and good movies; this fact is actually an argument for government to butt out and stick to doing its proper duties.

Lawrence W. Reed
Lawrence W. Reed
Those “studies” that purport to show X return on Y amount of government arts spending are a laughingstock among economists. The numbers are cooked and almost never compared to alternative uses of tax money. Even less frequently do subsidy advocates consider what people might choose to do if their earnings weren’t taxed away in the first place.

Every interest group with a claim on the treasury argues that spending for its projects produces some magical “multiplier” effect. Routing other people’s money through politicians and bureaucracy is supposed to somehow magnify wealth, while leaving it in the pockets of those who earned it is somehow a drag. Assuming for a moment that such preposterous claims are correct, wouldn’t it then make sense to direct all income through the government?

What if “public investment” simply displaces a certain amount of private investment? Arts subsidy advocates never raise this issue, but I know that I personally am far less likely to make a charitable donation to something I know is on the dole than to something that depends on the good hearts of willing givers.

What if I, as a taxpayer, could keep what the government would otherwise spend on the arts and invest it in my child’s education and get twice the return than the government would ever get on the arts? The more that government takes, the less we can purchase of the things we value, including tickets to the theatre or a concert.

Money which comes voluntarily from the heart is more meaningful than money that comes at gunpoint (taxes). For that reason I don’t believe in either arts welfare or shotgun marriages. There’s an endless list of desirable, enriching things, very few of which carry a tag that says, “Must be provided by taxes and politicians.”

If we don’t rob Peter the worker to pay Paul the artist, perhaps Paul may have to become a better artist or a better marketer of his art, or perhaps find another profession entirely. Welcome, Paul, to the real world of willing customers and earning an honest living.

Decoding Duane Goossen

The writing of Duane Goossen, a former Kansas budget director, requires decoding and explanation. This time, his vehicle is “Rise Up, Kansas.”

Duane Goossen was Kansas budget director from 1998 to 2010.1 He is critical of the administration of Kansas Governor Sam Brownback and recent sessions of the Kansas Legislature. It’s useful to examine his writings so that Kansans may become aware of the ramifications of his recommendations, and how during his years as budget director he was unable to adhere to the principles he now advocates. Following, some language from his recent article Rise Up, Kansas.

Goossen: “This marks the beginning of a hopeful new chapter in the Kansas story. It also presents a desperately needed opening for comprehensive tax reform.”

Comprehensive tax reform. That sounds good, as “reform” has a positive connotation. It means change for the better. But in this case reform means raising taxes, and by a lot. In fact, advocates of tax increases generally won’t say by how much they want to raise taxes.

As an example, in May a coalition of spending groups called for what they termed “Option 4.” It would eliminate all tax cuts enacted since 2012. This action would reinstate the tax on pass-through business income — the so-called “LLC loophole.” But this would also raise income taxes wage income, as those tax rates also were reduced in 2012. For example, income tax rates for a married family earning up to $30,000 would rise to 3.50 percent from the current 2.70 percent. That’s an increase of 30 percent in the income tax rate. For other income levels the increase is greater.2

A spokesperson for the Option 4 coalition argued that rolling back the tax cuts could increase revenue to the state by $1 billion. By the way, the Option 4 coalition did not call for the rollback of the sales tax increase passed in 2015. I should qualify that with apparently, as no handouts explaining Option 4 can be found. In addition, an audio recording of the press conference has been removed.

Members of the Option 4 coalition included Shannon Cotsoradis of Kansas Action for Children, Bob Totten from the Kansas Contractors Association, Rebecca Proctor of the Kansas Organization of State Employees, and Mark Desetti from the Kansas National Education Association.3

With the exception of the pass-through business income tax, failing to be specific about whose taxes will be raised by how much is characteristic of spending groups. In fact, these spending groups generally shy away from using the term tax. Look at these examples of language from Goossen’s article:

  • damage to state finances
  • hemorrhage revenue
  • can’t start healing while still in triage mode
  • fix our structural revenue imbalance
  • broaden the tax base
  • means reviewing our entire tax code
  • modernizing all revenue sources
  • get our fiscal house back in order
  • begin with commonsense basics
  • new priorities
  • recover the opportunities we lost
  • senseless era of crisis
  • begin restoring those opportunities
  • rise above the political fray
  • find courage to make difficult decisions
  • imagine the possibilities

Commonsense basics. Who could be against that? Yet each of these terms is a call for more and higher taxes.

Goossen: “Three credit rating downgrades”

The Kansas credit rating has declined. In making this decision, Moody’s mentioned “revenue reductions (resulting from tax cuts) which have not been fully offset by recurring spending cuts.4 So Kansas has a decision: Offset revenue reductions with higher taxes or spending cuts. Moody’s doesn’t care which is chosen, but Goossen and the spending coalition does.

KPERS funded ratio through 2014Of note, Moody’s mentions another problem: “an underfunded retirement system for which the state is not making actuarially required contributions.” This is an ongoing problem, as the nearby chart illustrates. The funding ratio of the Kansas retirement plan has deteriorated for many years, including the years when Duane Goossen was Kansas budget director. (Recently Kansas has improved the funding ratio of KPERS, but it did that by borrowing funds, which was an unwise decision. Because of the borrowing, Kansas has delayed schedule KPERS contributions, which effectively pays for current spending with long-term debt.5)

Moody’s also mentioned “In recent years the state has appropriated funds from or shifted costs to the State Highway Fund to help balance the general fund budget.” This too, is an ongoing problem.6 “Raiding the Bank of KDOT” has been a problem for many years, including the years when Duane Goossen was Kansas budget director.

Goossen: “It will likely take a generation to fully recover from this horrible experiment.”

Spending in Kansas. Click for larger.
Spending in Kansas. Click for larger.
Goossen is not specific as to the nature of the damage. Generally, a claim of slashed state spending is made. But it’s difficult to see the purported decline. Some programs may have been cut, but overall, spending is level or climbing, as can be seen in the nearby chart.7 Additionally, in comparison to other states Kansas spends a lot, and continues to.8

Goossen: “lifting the burden the Brownback plan forced onto our lowest-earning Kansans.”

Yes, we should sharply reduce or eliminate the sales tax on groceries. It affects low-income households most severly.9

Goossen: “And it means establishing a responsible state savings account.”

Kansas General Funding ending balance. Click for larger.
Kansas General Funding ending balance. Click for larger.
Kansas doesn’t have what some states have, which is a true rainy day fund that is governed by statute as to when contributions must be made and when the fund may be used. Instead, Kansas has a simple requirement for an ending balance of 7.5 percent, which the state has regularly ignored for decades. Low ending balances are a hallmark of Kansas government, including the years when Duane Goossen was Kansas budget director. In fact, in one year his budget had a negative ending balance.10


Notes

  1. Goossen, Duane. Kansas Budget Blog. http://www.kansasbudget.com/.
  2. Kansas Policy Institute. *Option 4: Soak the poor. https://kansaspolicy.org/option-4-soak-poor/.
  3. Hancock, Peter. Session resumes with call for total repeal of Brownback tax cuts. Lawrence Journal-World, April 27, 2016. http://www2.ljworld.com/news/2016/apr/27/session-resumes-call-total-repeal-brownback-tax-cu/.
  4. Moody’s Investors Service, Inc. Moody’s downgrades Kansas issuer rating to Aa2 from Aa1, notched ratings to Aa3 from Aa2 and KDOT highway revenue bonds to Aa2 from Aa1; outlook stable. April 30, 2014. https://www.moodys.com/research/Moodys-downgrades-Kansas-issuer-rating-to-Aa2-from-Aa1-notched–PR_298383.
  5. Weeks, Bob. This is why we must eliminate defined-benefit public pensions. https://wichitaliberty.org/kansas-government/we-must-eliminate-defined-benefit-public-pensions/.
  6. Weeks, Bob. Kansas transportation bonds economics worse than told. https://wichitaliberty.org/kansas-government/kansas-transportation-bonds-economics-worse-than-told/.
  7. Weeks, Bob. Kansas government spending. https://wichitaliberty.org/kansas-government/kansas-government-spending-2/.
  8. Weeks, Bob. Spending in the states, per capita. Interactive visualization. https://wichitaliberty.org/economics/spending-states-per-capita-2/.
  9. Weeks, Bob. Kansas sales tax has disproportionate harmful effects. https://wichitaliberty.org/taxation/kansas-sales-tax-has-disproportionate-harmful-effects/.
  10. Weeks, Bob. Kansas General Fund. https://wichitaliberty.org/kansas-government/kansas-general-fund-2/.

How would higher Kansas taxes help?

Candidates in Kansas who promise more spending ought to explain just how higher taxes will — purportedly — help the Kansas economy.

Are low taxes important to an economy, especially a state economy? When the Tax Foundation looked at the issue, it concluded this: “In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth.”1

Per-capita tax collections, Kansas and nearby states. Click for larger.
Per-capita tax collections, Kansas and nearby states. Click for larger.
Many of these studies concerned the national economy and taxes, but some looked at state taxes. When we look at Kansas, we see that Kansas already taxes and spends quite a lot, compared to other states. Nearby is a chart showing per-capita state tax collections in Kansas and Colorado.2

State and Local Government Employee and Payroll. Click for larger.
State and Local Government Employee and Payroll. Click for larger.
Looking at other data, I found that considering all state and local government employees in proportion to population, Kansas has many, compared to other states, and especially so in education.3

State and local government employment and costs, selected states. Click for larger.
State and local government employment and costs, selected states. Click for larger.
From another source of data, I found this: “In the visualization, you can see that Kansas spends quite a bit more than nearby states. Of special interest is Minnesota, which is often used as an example of a high-tax state, and a state with excellent schools and services. But Minnesota spends barely more than Kansas, on a per-person basis. What about Colorado? It seems that Kansans often look to Colorado as a state full of bounty. But Kansas outspends Colorado. Same for New Mexico, Wisconsin, Texas, and — especially — Missouri.”4

Please don’t argue that the economic health of a state is determined by its budget, that is, whether it is balanced or not. And if you want to argue that Kansas has borrowed money through the highway fund and spent it in the general fund: That’s true, and we should not do that. But that action allowed Kansas to keep spending, much like borrowing allows the federal government to keep spending more that it raises through taxes.

Some argue that if the state taxes more, it can spend more, and therefore the economy expands. But: The money taken from Kansans is money that they can’t spend. And if one wants to argue that government spends more carefully and efficiently than do private individuals spending their own money — well, give it a try. Empirically, not many people believe this.

And isn’t government spending the purpose of taxation? Nearby are figures showing Kansas general fund spending. You can see that for two years Kansas spent much more than it collected in revenue, using a large ending balance as the source of funds. If one believes in the Keynesian theory of fiscal effects — which most liberals and progressives do — this “deficit” spending spared spending cuts and therefore boosted the Kansas economy.

Kansas General Fund spending, showing large deficits of revenue compared to spending in 2014 and 2015.
Kansas General Fund spending, showing large deficits of revenue compared to spending in 2014 and 2015.

Regarding the spending cuts that some claim: Have there been severe spending cuts in Kansas? While some programs have been trimmed, overall state spending continues on a largely upward trend (for all funds spending) or remains mostly flat (for general fund spending), after accounting for population and inflation.5

kansas-per-capita-spending-adjusted-for-cpi-2016-10

Kansas revenue estimate errors. Click for larger.
Kansas revenue estimate errors. Click for larger.
We also hear that the Kansas economy is in bad shape because tax revenue has fallen short of estimates. This is not a good indicator of economic health. Instead, it illustrates the difficulty of economic forecasting. Moreover, the negative estimate variances — revenue shortfalls, in other words — in 2002 to 2003 and 2009 to 2010 were generally much larger in magnitude than those of recent years.6 Remember how the Obama administration told us that without the 2009 stimulus package unemployment would rise to a certain level? Well, the stimulus bill passed, we spent the money, and unemployment was higher than what the administration said it would be without the stimulus. And for a long time, too.7

We also hear that transfers from KDOT — the highway fund — have hurt Kansas, especially in construction jobs. Our state’s two largest newspapers recently editorialized on this matter.8 They correctly reported that Kansas construction jobs were down. But it wasn’t highway construction jobs that caused the loss of jobs, except for a very small portion.

KDOT spending on major road programs. Click for larger version.
KDOT spending on major road programs. Click for larger version.
Furthermore, the state has continued to spend on highway programs, without regard to transfers from the highway fund. When we look at actual spending on roads, we see something different from what is often told. KDOT’s Comprehensive Annual Financial Report shows spending in the categories “Preservation” and “Expansion and Enhancement” has grown rapidly over the past five years. Spending in the category “Maintenance” has been level, while spending on “Modernization” has declined. For these four categories — which represent the major share of KDOT spending on roads — spending in fiscal 2015 totaled $932,666 million, up from a low of $698,770 in fiscal 2010.

We should not borrow money, place it in the highway fund, and then transfer the funds to the general fund, as the state has done for many years. But actual spending on highways has risen, nonetheless.

So: Just how will higher taxes help the Kansas economy?


Notes

  1. McBride, William. What Is the Evidence on Taxes and Growth? Tax Foundation, 2012. http://taxfoundation.org/article/what-evidence-taxes-and-growth.
  2. Weeks, Bob. Tax collections by the states. Interactive visualization. https://wichitaliberty.org/economics/tax-collections-states-2/.
  3. Weeks, Bob. State and local government employee and payroll. Interactive visualization. https://wichitaliberty.org/economics/state-local-government-employee-payroll/.
  4. Weeks, Bob. Kansas, a frugal state? Interactive visualization. https://wichitaliberty.org/economics/kansas-frugal-state/
  5. Weeks, Bob. Kansas government spending. https://wichitaliberty.org/kansas-government/kansas-government-spending-2/.
  6. Weeks, Bob. Kansas revenue estimates. https://wichitaliberty.org/kansas-government/kansas-revenue-estimates/.
  7. Weeks, Bob. Brownback and Obama stimulus plans. https://wichitaliberty.org/economics/brownback-and-obama-stimulus-plans/.
  8. Weeks, Bob. Topeka Capital-Journal falls for a story. https://wichitaliberty.org/kansas-news-media/topeka-capital-journal-falls-story/.

Kansas Democrats: They don’t add it up — or they don’t tell us

Kansas Democrats (and some Republicans) are campaigning on some very expensive programs, and they’re aren’t adding it up for us.

A sampling of campaign literature from Kansas Democratic candidates in south and west Wichita for the Kansas Legislature1 reveals several common threads:

  • Few will identify themselves as Democrats.
  • Eliminating the LLC loophole is popular.
  • Eliminating or reducing sales tax on food is popular.
  • Eliminating the 2015 sales tax increase is popular.
  • Fully funding schools is popular.
  • None of these show the cost of these ideas, nor do they offer ideas on how to pay for these things, except for eliminating the LLC loophole.

What will these things cost? Here’s some figures.

LLC loophole and food sales tax: This year a bill was proposed in the Kansas Legislature to restore taxation of non-wage business income, that is, to eliminate the so-called “LLC loophole.” It would also reduce the sales tax on food from 6.5 percent to 2.6 percent. The fiscal note for this bill estimated an increase in tax revenue to the state of $260.9 million from the non-wage business income, and a loss of revenue to the state of $234.1 million for the sales tax reduction.2

Extrapolating the food sales tax figures implies that eliminating the sales tax on food would mean a loss of revenue to the state of $435 million, assuming no change in consumer behavior.

Rollback general sales tax: In 2015 when the legislature voted to raise the statewide sales tax from 6.15 percent to 6.50 percent on July 1, 2015, it was estimated that revenue to the state would increase by 164.2 million. For fiscal year 2017, by 186.7 million.3

(By the way, the tax on cigarettes was increased by an estimated $40.39 million. If we’re rolling back sales tax increases, we should roll back this 50 cent per pack increase, too. I haven’t seen any advocates for this.)

Fully funding schools: Who knows what “full funding” really means? The Kansas Supreme Court believes it — and it alone — has the ability to put a number on this. A consensus seems to be developing at around $450 million per year in additional school funding is what the court may order.

Adding up the costs (using some numbers a few years old): $260.9 million – $435 million – $164.2 million – $450 million equals -$1,310.1 million in changes to annual general fund revenue. ($-1,350.5 million if we want to be fair to smokers.)

This is the proposed change to Kansas general fund revenue that these candidates omit from their campaigns. It is the amount by which taxes must be raised, or spending be cut (or a combination of taxes and cuts). Some of these numbers are estimates that could be off by a lot. There can be some quibbling, such as reducing the food sales tax instead of eliminating it, which will change the numbers. But there’s no doubt that the plans Kansas Democrats propose will cost a lot of money.

Total revenue to the general fund in 2016 was $6,073.4 million. Major sources include:
Income taxes (individual, corporate, financial institution): $2,640.8 million
Excise taxes (sales, compensating use, cigarette, liquor, severance): $2,927.7 million

So if the state wanted to raise spending by, say, $1.310 billion dollars, it would have to raise income taxes by 49.7 percent, or excise taxes by 44.7 percent. Or a combination. Either way, that’s a lot.

When you see candidates for the Kansas Legislature — Democratic and Republican — mention these programs, ask if they know how much they will cost. Ask whose taxes will be raised or whose programs will be cut.

And ask this really important question: Just how will all this make Kansas a better state?

  1. Photographs of a number of pieces may be viewed in this folder at Flickr: https://flic.kr/s/aHskMJfGNc.
  2. Kansas Legislature. HB 2444. Eliminating the business non-wage income tax exemption and reducing the sales tax rate on food. http://www.kslegislature.org/li/b2015_16/measures/hb2444/.
  3. Kansas Legislature. Revenue Enhancements and Other Provisions; Senate Sub. for HB 2109, as amended by House Sub. for SB 270 and HB 2142. http://www.kslegislature.org/li/b2015_16/measures/documents/summary_hb_2109_2015.pdf.

WichitaLiberty.TV: Wichita and Kansas economics, and government investment

In this episode of WichitaLiberty.TV: Wichita sells a hotel, more subsidy for downtown, Kansas newspaper editorialists fall for a lobbyist’s tale, how Kansas can learn from Arizona schools, and government investment. View below, or click here to view at YouTube. Episode 131, broadcast October 30, 2016.

Shownotes

Kansas revenue estimates

Kansas revenue estimates are frequently in the news and have become a political issue. Here’s a look at them over the past decades.

A favorite criticism of liberals and progressives across the nation is that in Kansas, actual revenues to the state’s general fund have fallen short of projections, month after month. Reading most newspaper reports and editorials, one might think that these negative variances are a new phenomenon, and one relished by the Left. As many as a dozen articles on this topic have appeared in the New York Times in the past two years.

The revenue estimates in Kansas are produced by a body known as the Consensus Revenue Estimating Group. It consists of one member each from the Division of the Budget, Department of Revenue, Legislative Research Department, and one consulting economist each from the University of Kansas, Kansas State University, and Wichita State University.

As described: “This group meets each spring and fall. Before December 4th, the group makes its initial estimate for the budget year and revises the estimate for the current year. By April 20th, the fall estimate is reviewed, along with any additional data. A revised estimate is published, which the Legislature may use in adjusting expenditures, if necessary.”1

The estimates are important because the legislature and governor are required to use them when formulating budgets and spending plans. If the estimates are high, meaning that revenue is less than expected, it’s possible that the legislature or (more likely) the governor will need to make spending cuts. (The other alternative is that leftover funds from prior years may be used, if available.)

If, on the other hand, the estimates are too low, meaning that revenue is higher than expected, the state has collected too much tax revenue. In this case, the state should refund the excess to taxpayers. Some states do that, notably Colorado, although residents may vote to let the state keep the excess.

Some states have true rainy day funds, and the excess revenue might be used to build that fund’s balance. In a true rainy day fund, the fund’s balances can be spent only under specific sets of circumstances.

But in Kansas, the excess revenue is simply called the “ending balance” and is available to spend at the legislature’s whim. That’s what happened in fiscal years 2014 and 2015, when the state spent $340 million and $308 million, respectively, of the ending balance rather than cut spending.

What has been the history of the revenue estimates compared to actual revenue? First, know that making these estimates is not easy. Some of the inputs to the process include the inflation rate in future years, interest rates in future years, and the prices of oil and natural gas in the future. If someone knew these values with any certainty, they could earn huge profits by trading in futures markets.

The state makes the revenue estimates available.2 I’ve presented the results since 1975 in a chart at the end of this article. For each year, two numbers are presented. One it the difference from the Original Estimate and actual revenue. The other is the difference from the Adjusted Final Estimate and actual revenue.

We can see that in fiscal years 2014 and 2016, the variance of the estimates is negative, meaning that revenue was lower than the estimates. The magnitude of these variances, however, is not out of line with the magnitude of the variances of other years, either positive or negative.

In fact, the negative variances — revenue shortfalls, in other words — in 2002 to 2003 and 2009 to 2010 were generally much larger in magnitude than those of recent years. This is of interest as Duane Goossen, who was budget director during these periods, is a prominent critic of the recent revenue shortfalls. Evidently he has forgotten the difficulty of creating these estimates.

While Goossen along with newspaper reporters and editorialists use the negative revenue estimate variances as a political weapon against the governor and conservatives, it is in the interest of the people of Kansas that revenue estimates be as accurate as possible. In an effort to produce more accurate revenue estimates, Governor Brownback created a commission to study the issue. That group released its report in October.3

Kansas revenue estimate errors. Click for larger.
Kansas revenue estimate errors. Click for larger.


Notes

  1. Consensus Revenue Estimating Group. Available at budget.ks.gov/cre.htm.
  2. Kansas Division of the Budget. State General Fund Receipt Revisions for FY 2016 and FY 2017. May 2, 2016. Available at: budget.ks.gov/files/FY2017/CRE_Long_Memo_April2016.pdf. Also Kansas Legislative Research for 2016 figures.
  3. Governor’s Consensus Revenue Estimating Working Group. Final Recommendations. Available at budget.ks.gov/files/FY2017/cre_workgroup_report.pdf.

Kansas tax receipts

Kansas tax receipts by category, presented in an interactive visualization.

The Kansas Division of the Budget publishes monthly statistics regarding tax collections. These figures have been gathered and are presented in an interactive visualization. In the visualization, there are these available tabs:

Table.s: A table of data. For each month the two data items supplied by the state are the actual value and the estimated. This table also holds the computed variance, or difference, between the actual value and the estimated value. A positive number means the actual value was greater than the estimated value.

Collections: Shows monthly collections for each component. Because monthly numbers vary widely, this data is presented as the moving average of the previous 12 months.

Annual Change: Shows the change from the same month of the previous year. A positive value means the value for this month is greater than the same month last year.

Estimates: The Governor’s Consensus Revenue Estimating Working Group provides monthly estimates. This chart shows the variance, or difference, between the actual value and the estimated value. A positive number means the actual value was greater than the estimated value.

Running Total Estimates: This is the cumulative sum of the estimate variances, reset to zero at the start of each fiscal year (July 1).

Running Total Change from Prior Year: This is the cumulative sum of the monthly changes from the prior year, reset to zero at the start of each fiscal year (July 1).

For the past two years, individual income tax collections have been relatively flat. There are variations each month, but overall the trend is slightly up. Corporate income tax collections are on a slight downward trajectory.

Retail sales tax and compensating use tax have been mostly rising for two years. A higher sales tax rate took effect on July 1, 2015, with the rate rising from 6.15 percent to 6.50 percent.

Cigarette taxes have risen rapidly since July 2015 when higher tax rates on these products took effect. The same trend is present in the tobacco products tax.

Severance taxes — tax collected on natural gas and oil as it is extracted from the ground — have been on a downward trend as prices for these produces have fallen. This is a sizable tax. In June 2014 collections of this tax were running at about $143 million per year. For September 2016, the rate is $22 million annually.

Click here to use the visualization.

Source of data is Kansas Division of the Budget.

GetTheFactsKansas launched

From Kansas Policy Institute and the Kansas Chamber of Commerce, a new website with facts about the Kansas budget, economy, and schools.

GetTheFactsKansas.com aims to provide Kansans with factual information about our state. Sometimes this is in short supply, so this effort is welcome.

get-the-facts-kansas-logoAs an example, when explaining school spending, the site notes: “At $13,124 per-pupil, 2015 marked the third consecutive year of record-setting funding according to the Kansas Department of Education (KSDE). And if the Department’s estimates hold, another new record will be set when the 2016 final results are reported. Record funding is not the result of accounting changes; emails from KSDE confirm that no accounting changes impacted state or district funding totals for more than ten years. There was a correction effective in 2015 when the state-mandated 20 mills of property tax began being properly recorded as State Aid instead of Local Aid, but there would have been an increase in State Aid without that change.”

Information like this rebuts two arguments that Kansas progressives use. First, that the increase in school spending is due to a recent change in the way KPERS payments are reported. But, there has been no change in ten years. Second, that the shift in the reporting of local property taxes is used to falsely inflate state spending. As KPI notes, even after adjusting for this change, state funding of schools has risen.

Access the website at GetTheFactsKansas.com and follow its Facebook page at Get The Facts Kansas.