Kansas lawmakers failed to strike a deal to repair a three-quarters-of-a-billion-dollar budget hole before the legislative session ended last week, prompting an extended session with a large daily pricetag. Local observers sense that the basic shape of a compromise is already clear to most lawmakers. But every extra day they spend hashing out a deal to partially repeal the state’s enormous, budget-busting tax cuts will cost taxpayers the equivalent of a new BMW.
On one side, die-hard conservatives in the legislature are resisting efforts to unwind a key piece of Gov. Sam Brownback’s (R) signature tax cuts. On the other, a bipartisan group of lawmakers are saying it’s time to admit the governor’s approach is unworkable. While they quarrel, Kansas faces a two-year deficit projected to be well over a billion dollars – a piddling amount in Congress, but equal to nearly 17 percent of the state’s $6 billion annual spending.
The state’s normal legislative session ended on Friday without producing a bill to address the $765 million deficit for the fiscal year that begins this summer. Even assuming that legislators employ a handful of one-time fund transfers proposed by Brownback, there’s still over $400 million of ground to make up. Lawmakers are staying in Topeka to hammer out a deal, but there has been little progress so far in establishing a consensus on how to fill the gap. Even operating with a barebones staff, each extra day of the session is adding $43,000 to the wrong side of the cash-strapped state’s ledger.
Neither the Senate nor the House have come anywhere near passing a bill that closes the budget hole yet. Attempts in each body have floundered in ways that might make observers nervous, such as last Friday’s defeat in the House of a bill based on hiking sales taxes. Opposition to the idea was so strong that the measure was shouted down on a voice vote, without any recorded tally of ayes and nays. But rather than a panic-inducing failure, Kansas Center for Economic Growth executive director Annie McKay told ThinkProgress, that vote signaled that the ultimate resolution of the budget problem will require lawmakers to roll back one of Brownback’s signature cuts.
The bulk of Brownback’s tax moves in 2012 and 2013 revolved around state income tax rates for individuals. Those cuts, which primarily benefited those already wealthy enough to shoulder a greater share of the cost of schools and roads in Kansas, are politically untouchable even in the current calamity. But Brownback’s other signature move has lost the support of several of his fellow Republicans and will likely be at the epicenter of any budget deal lawmakers ultimately achieve.
Anyone who files their taxes under sections of the tax code that were designed for small businesses is now exempt from income tax thanks to the GOP’s decision to eliminate taxes on what’s called “pass-through income.” The idea creates various problems, some obvious and others obscure. For starters, almost anyone with the accounting savvy and necessary free time can restructure their business to pay themselves through “pass-through income” rather than a normal salary if they choose. The exemption thus means a windfall for lawyers whose firms are organized as partnerships, authors who receive book royalties through a licensed business, and other wealthy people who aren’t in any position to create jobs for others through their business.
But even for actual employers, it turns out Brownback’s policy doesn’t do much to create jobs — and may even hurt the very species of entrepreneur it was sold as helping.
State Rep. Mark Hutton (R) recently revealed official state data on how the exemption has panned out. Far more tax filers have used it than the 191,000 that the state predicted. Of the 333,000 S-corporations, farmers, and limited partnerships that have stopped paying any income tax to Kansas, about 298,000 have reaped a reward smaller than $1,000 per year. That’s an abysmal number for a policy idea that was supposed to spur job creation. “The benefit of this policy is insignificant in inducing businesses to come to this state to hire employees,” Hutton said at a hearing in early May.
A tiny sliver of Kansas filers at the top end of the business income spectrum collected an average return of $38,000 from the move. But even that amount is highly unlikely to encourage them to create jobs, McKay said. “There’s not enough in there to create a bevy of jobs, and even the one job they might create isn’t going to be a living wage job with benefits at $38,000.”
If Kansas wants to spur innovation and entrepreneurship among what business analysts call “gazelles” – small, fast-moving companies that actually hire people – income taxes aren’t the right lever to pull, as the Center on Budget and Policy Priorities’ Mike Leachman explained. “What they need is talent. They need a workforce that will help them make and sell their product, and it’s also important to them what the local quality of life is,” Leachman told ThinkProgress.
The same tax cuts that provide too little return to free up a full year’s salary and benefits for a business owner also help deprive the state of resources it needs to make the idea of living and working in Kansas seem appealing to anyone. “You can make the environment worse for the gazelles if your tax cuts end up hurting the local schools, or the universities that help supply the workforce these companies need, or your local quality of life in general,” Leachman said.
Kansas’ public schools are almost criminally underfunded. Judges have ruled repeatedly in recent years that the state was providing such low levels of funding that school budgets were unconstitutional, and Brownback has responded by shuffling money around the system in ways that still produce overall cuts in per-pupil funding. Even before those moves, budgets were so dire that some school nurses were told to keep frozen kitchen sponges on hand to replace real ice packs.
Still, some diehards are insisting Brownback’s policies are working and that the key is to stay the course. A Wall Street Journal op-ed recently pointed to a handful of cherry-picked statistics to argue that the state’s private sector job growth is rebounding in ways that vindicate the governor. Leachman noted that Kansas currently accounts for the exact same share of America’s private sector jobs that it did in 1990, and noted an academic consensus that “personal income tax levels are not important” to job creation. But if state lawmakers heed the Brownback camp’s argument, it could be a long and expensive summer in Topeka.
For her part, McKay hopes they will instead look across the border to the neighboring states that have enjoyed stronger job growth since Brownback’s cuts passed.
“They’re all able to fund schools, able to pave roads, aren’t running up the state credit card in order to provide services,” she said. “They really got a better deal.”