The Kansas Tax Cuts Are Not to Blame for Revenue Woes
Several pundits, including the New York Times's Paul Krugman, have made hay over Kansas’ “revenue shortfall” this past fiscal year, chalking it up to the historic 2012 and 2013 Kansas tax cuts. At first glance, one might suppose them correct. Indeed taxes were cut and revenue did fall. But their 30,000 foot view passes over the more likely culprit behind the $338 million revenue drop – a change in the federal capital gains rate, caused by President Obama’s forced expiration of some of the Bush tax cuts.
The Kansas tax reforms did not cause the revenue shortfall. According to the Kansas Department of Revenue (KDOR), the shortfall stands at about $338 million for FY 2014, which ended on June 30. Now, $103 million of that—nearly a third--can be squarely blamed on the Division on the Budget increasing its revenue estimate just months before the end of the fiscal year. In the beginning of April 2014, the Division on the Budget increased their revenue estimate from $235 million to $338 million, citing strong economic indicators. The revision occurred right before Division on the Budget realized that their revenue estimates for the year were off beyond what could be considered a standard deviation. If you subtract the $103 million revenue error and use the original revenue projection, the shortfall is only $235 million.
As ATR has argued—and backed with CBO data—in the past, the shortfall is mainly due to a shift in capital gains payments by taxpayers into the prior fiscal year to avoid higher rates caused by the expiration of some of the Bush tax cuts (namely the increase in capital gains tax). Several states experienced surplus revenue in 2012-2013 (Virginia, Connecticut, and New Jersey) but are now experiencing deviations from initial revenue estimates or downward revisions in state revenue for 2013-2014. In Connecticut, for example, Democrat Gov. Dan Malloy’s budget director blamed their $400 million decrease in projected revenue on the capital gains shift prompted by the Fiscal Cliff.
Josh Barro in the New York Time’s “The Upshot” argues that if you reduce taxes you will get less revenue. No one is arguing with this assertion, at least in the short term. In fact, KDOR agrees with Barro: “The initial estimate for FY 2014 is $5.464 billion, which is $704.8 million, or 11.4 percent, below the newly revised FY 2013 figure. Factors influencing this forecast in addition to the state of the economy include the fully annualized impact of the new state income tax law that is effective in tax year 2013….” For Barro and other critics, the shortfall is proof-positive that Brownback’s tax cuts have wrecked the Kansas economy, except that there is, again, plenty of evidence that the error has more to do with federal tax policy than state tax policy.
As noted above, the shortfall actually stands at about $235 million for this past year. Duane Goossen, a former Kansas Budget Director who served under three governors (one Republican, two Democrats), has estimated that the capital gains shift possibly cost Kansas $147 million in tax revenue: “If Kansans had claimed another $3 billion of income for 2013 and that income had been taxed at the upper rate of 4.9 percent (the highest rate in place for tax year 2013), at most $147 million would have been added to state income tax collections in FY 2014… Even $147 million in additional tax receipts... would not have stemmed the tide of our state's $712 million revenue drop.”
A critic of the tax cuts, Goossen uses a gimmick to make the capital gains shift look minor by comparing it to year-to-year revenue (a much larger drop but one anticipated and factored into the revenue estimate by the Division of the Budget) as opposed to the estimating error as it stands. If compared to the past year’s shortfall, the capital gains shift caused by President Obama’s intransigence makes up roughly 62.5% of the revenue shortfall (using Goossen’s $147 million estimate).
Additionally, $10 million of the revenue shortfall can be attributed to a drop in Kansas’s excise tax collections in the first quarter of 2014. This coincides with the negative GDP growth experienced by U.S. during the same period. Negative growth suppresses consumption and would throw off excise tax revenue estimates.
In the end, the Kansas tax cuts may account for a net revenue deviation of about $78 million – or 1.5% of Kansas’s total revenue collections, projected to be $5,986,481,000 this past year. Anything below a deviation of 2% is something most states that have not enacted major tax reform experience on an annual basis. As to worries of a future shortfall and lost revenues, most responsible legislators in Kansas will tell you that there needs to be some spending restraint in the state and it is their intention to enact said restraint, avoiding any further revenue woes. In short, the Kansas revenue shortfall is little more than hyperventilating scare tactics. Don’t’ believe the fever-pitch hype.