Tough choices on taxes, revenue
On Jan. 15, Gov. Sam Brownback gave the State of the State address, outlining his priorities for 2013, including increasing student reading proficiency, leveraging economic growth and advancing government efficiency.
Possibly the biggest news in his address was his proposal to cut income taxes further and continue on a path to zero state income tax. Although we legislators have not yet seen the details of these proposed cuts, it certainly will be difficult to manage while we are attempting to digest the large tax cut enacted in early 2012.
On Jan. 16, Gov. Brownback's staff released his recommended budget for fiscal year 2014. It is certainly not an extravagant budget. While some will call it responsible, others might use the term "austere." It reflects the fact the state is facing a funding shortfall as a result of the large tax cut enacted last spring. Additionally, in order to make revenues and expenditures match, Gov. Brownback is proposing two new revenue sources:
* Permanent extension of the temporary sales tax increase enacted in 2010 and scheduled to end July 1.
* Elimination of the home mortgage interest deduction on Kansas tax returns.
This budget sets up a dilemma with choices that will be very difficult. If we in the Legislature agree to extend the sales tax increase, we are making a conscious decision to abandon the "three-legged stool" concept of financing government in our state by an equal reliance on sales, income and property tax. That system has been lauded in the past as being a system that is broad-based and provides stability and equity.
All three are cited frequently by economists as desirable characteristics for a state taxing system. An economist with the Kansas City Federal Reserve cited Kansas a few years back as having the least volatile tax revenues of all the states in the 10th District during the past 40 years.
So are we prepared to abandon the concept of fairness for Kansas citizens in hopes the economic theory that lower taxes will produce explosive economic growth really proves to be true? That is far from being accepted economic theory at this point, and even Gov. Brownback has termed the tax cut a "real live experiment." No one can be sure of the result. What is the cost to both taxpayer and government of moving to a system that is less stable and predictable? These are very serious questions. Unfortunately, I do not hear enough discussion on these issues in Topeka.
On the other hand, eliminating the mortgage interest deduction is not as important as it was before the 2012 tax cut. Because tax rates have been reduced, the deduction has less value to any taxpayer. Additionally, the 2012 tax cut bill provided for expanding the standard deduction from $4,500 to $9,000. The result will be that many more Kansas taxpayers will not have enough deductions to itemize and will end up taking the standard deduction. For those folks, losing the mortgage interest deduction will not matter. Of course, the deduction still will be available on federal tax returns, and the deduction is a much more important item there. It is hard to imagine that losing the deduction on their Kansas tax returns would be an important enough matter to alter Kansans' home-buying plans. And one could argue that if that deduction were the turning point on whether someone buys a home or not, then they probably were trying to buy a home they couldn't afford.
But here is the other part of the hard equation: If we in the Legislature cannot agree to extend the sales tax and eliminate the home mortgage interest deduction, then we will have created a $425 million hole in the governor's budget. Without additional revenue, we will be forced to make very significant cuts to state budgets and we will have to push some portion of the cost back to the local level in the form of higher property taxes. Keep in mind more than $1 billion already has been wrung out of the state budget in recent years, and the easy cuts are long gone. If additional efficiencies can be achieved, I am confident this administration will find them. If we are forced down the road of cutting budgets further, the pain to Kansas citizens and the harm to Kansas' infrastructure will be significant.
With decisions of this magnitude facing us, it is bound to be a very interesting session.
Don Hineman represents the 118th House District. firstname.lastname@example.org