Sunday, May 6, 2012
Reducing income and sales taxes requires Kansas legislators to have faith that the cuts will stimulate economic growth as advertised, as even the most solid projections involve some guesswork.
A disagreement last week between the Legislature's nonpartisan staff and Republican Gov. Sam Brownback's administration over those projections obscured a reality in state government -- that forecasting state revenues and spending is difficult and even foolhardy.
In pushing lawmakers to cut income taxes, Brownback has argued that the expected increase in economic activity and hiring by private companies also will benefit the state treasury. Many members of the Republican-controlled Legislature agree.
But even positive forecasts, ones without budget shortfalls into 2018, aren't enough to reassure skeptical colleagues, who can find plenty of issues in the numbers.
"We have to be hopeful -- plan like the governor wants to do -- that what we're doing here with tax policy is going to create the kind of atmosphere that we've been trying to create for a long, long time," said lead Senate negotiator Les Donovan, a Wichita Republican.
House and Senate negotiators drafted the income tax plan, which is supposed to come up for a vote in both chambers this week, the last scheduled for the Legislature's annual 90-day session.
The plan reduces individual income tax rates and exempts 191,000 partnerships, sole proprietorships and other businesses from ncome taxes. It also reduces the sales tax to 5.7 percent in July 2013 from its present 6.3 percent, and provides about $60 million in tax relief for the fiscal year that begins July 1, growing to nearly $600 million annually after five years.
Critics believe the tax cuts could create a permanent budget crisis. If Brownback and his allies are wrong, the state will face years of cuts in aid to public schools and spending on social services and other programs.
"I certainly have a lot of questions about how this affects the long-term financial stability of the state," said House Minority Leader Paul Davis, a Lawrence Democrat.
Suspicions are rooted in the regular boom-and-bust cycles of the state's finances. Good times inspire additional spending, tax cuts or both, followed by ugly decisions when the economy inevitably slows.
Republican Gov. Bill Graves was a champion tax cutter in 1998 when times were good and a big tax raiser in 2002, when times were bad. When Democratic Gov. Kathleen Sebelius ran for re-election in 2006, she could boast that on her watch, Kansas made huge investments in public schools without raising taxes. But even without the Great Recession, the state almost certainly couldn't have sustained both trends.
Legislators wanted assurances that this year's round of proposed tax cuts won't hurt them five or six years from now. The numbers had swung wildly, and the Brownback administration questioned the method that legislative researchers used to calculate the cumulative effects of the tax cuts.
Even though researchers have used the method without many questions about its validity for years, Brownback's administration briefly suggested that legislators should use its figures instead. But legislators stuck with their staff's numbers, and House and Senate negotiators made the cuts in individual income tax rates less aggressive.
"I don't know that we've ever done a tax cut like this," Revenue Secretary Nick Jordan said.
Yet, as Democrats who are skeptical of the plan noted, the numbers the negotiators are using are far from foolproof -- just like any six-year projections. The latest forecast predicts that spending -- financed with the state's general tax revenues -- will grow an average of 2.3 percent annually through mid-2018. The average growth for the past 10 years has been 4.8 percent.
Brownback's allies assume his election in 2010 and conservatives' increasing legislative strength heralds tighter budgeting. Granting that, there still are potential issues with the projection.
The Legislature's staff has accepted the administration's figures for potential savings -- $368 million over five years -- from its planned overhaul of the state's $2.9 billion a year Medicaid program.
Administration officials said last week that the Legislature's numbers could be too pessimistic in projecting revenue increases.
Some supporters of the tax plan also describe the Legislature's projections as "static," meaning they'll assume revenues will grow steadily all six years rather than accelerating if the state attracts new jobs.
Even if legislators sound certain about the numbers they're using when discussing tax cuts, they can't really be sure. They can predict success, but ultimately, they're appealing to each other's faith.