June 10, 2013 3:43 pm

Kansas tax cuts are causing chest pains, as expected ‘shot of adrenaline’ falls short

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Kansas legislators passed an eleventh-hour budget and tax bill on 2 June, compromising on slightly higher sales tax rates than originally intended, with a corresponding decline in income tax rates.

Official estimates project that the tax bill, HB 2059, raises USD 777m more over the next five years than would have been raised without any action. As previously reported, Kansas’ first income tax cut, enacted last summer, caused a USD 800m hole in the FY14 general fund budget, despite promises that it would spur economic activity and attract employers.

But that additional revenue won’t be enough. Estimates from the Legislative Research Department and Department of Revenue show general fund ending balances dropping to 5.4% in FY15, 3.1% in FY16, 1.4% in FY17, and negative .4% in FY18. Kansas state law requires a 7.5% ending balance.

Norton Francis, senior research associate with the Tax Policy Center, said he was surprised to see the state double down on a failing ideologically-driven tax strategy. “They already did this major tax cut and the results were a big budget gap so they decided to continue. Why not let the rates that they had stay and see if businesses will flock there?” he said.

Kansas is setting itself up for “an annual crisis” by so severely restricting revenue, he said.

The supply-side experiment

While the Legislative Research Department doesn’t make projections past five years, the tax bill sets a path for reducing income taxes to zero starting in FY19, as long as revenues are at least 2% higher than in the previous fiscal year, according to Bernie Koch, executive director of the Kansas Economic Progress Council.

Over the past 30 years, Francis said, Kansas has averaged about 6.5% revenue growth year over year, typical for states. He called 2% “a pretty easy target.”

In response to the arguments that the income tax cuts will create economic growth, Annie McKay, the executive director of the Kansas Center for Economic Growth, said she’s waiting to see how that happens.

“What we’re faced with in cutting taxes is declining revenues and difficult budget choices made, which impact the areas that are important to attracting businesses to a state. Without a ready workforce, who wants to set up shop here?” McKay said. “If we set up an education system like Texas or Florida, that doesn’t paint a pretty picture to an employer.”

McKay was also critical of the ideology behind the tax legislation. Governor Sam Brownback called the first set of income tax cuts “a shot of adrenaline in the heart of the Kansas economy,” she said

“When they didn’t see the gold rush of employers into Kansas … suddenly the tone and messaging around the supposed growth from last year’s tax cut changed to it’s going to take time and there may be lean years,” McKay said. “We had already bought into the dream that was sold in 2012 and the terms started changing pretty dramatically.”

The Kansas Center for Economic Growth ran projections on the final tax bill and budget with the help of Washington, DC-based Institute on Taxation and Economic Policy, and found that they actually constitute a tax increase on the poorest 20% of the population.

Starving the beast?

Even if politicians were to disregard spending on social programs and education, Francis said, employers want to relocate to places with solid infrastructure. The budget passed this weekend includes a USD 300m cut over two years to the Kansas Department of Transportation, which the state has raided in past years, as previously reported.

“People continue to lie to themselves and the Kansas public,” McKay said. “We are back to a revenue crisis. It’s not all unicorns and sunshine. You can only cut so much.”

A spokesperson for Governor Sam Brownback emailed a prepared statement which read: “I began the 2013 Legislative Session reflecting about the long tradition our state has of being bold in doing what was right, even if much of the nation took another way. The work accomplished these last few months affirms our state is leading the way.”

The statement also notes that the budget “funds core services, keeps state spending within the state’s means and leaves a healthy ending balance.”

Leading legislators from each house did not respond to a request for comment.

While Kansas does not issue general obligation debt, the ratings agencies maintain issuer credit ratings for its lease and appropriation-backed debt. Moody’s rates it Aa1 with a negative outlook and Standard & Poor’s rates it AA+ with a stable outlook. Series 2009-M Kansas Development Finance Authority revenue bonds maturing in 2034 last traded on 9 May 2013 at 112.5, yielding 2.851%, according to Electronic Municipal Market Access. Bondholders could not be identified.

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