COMMENTARY: Stuck in the middle, As Kansas cuts, Texas keeps “no income tax” status
Published: February 4th, 2013
OKLAHOMA CITY — On January 1, 2013, historic tax cuts were implemented in Kansas.
Lawmakers in Nebraska and Louisiana are watching, with the chief executives in both states wanting to follow the example of their colleague in Kansas. Something special, and bold, is happening.
Bottom line: Oklahoma’s neighbors in Kansas are at the front end of a bold plan to make tax cuts for taxpayers a central part of government policy. Texas retains its position as a no-income-tax bastion. Oklahoma is stuck in the middle.
Kansas has already slashed business taxes and lopped off much of the personal income tax. Now, Gov. Brownback wants to bring the top rate down to 3.5 percent. (Oklahoma’s top rate is presently 5.25 percent.) Brownback’s goal is to the put the state on “a glide path to zero” for personal income taxes.
That’s going to require some budget discipline — but thanks to two years of good stewardship from Gov. Brownback, there’s enough money right now to take care of essential spending while continuing to study ways to “right-size” state government.
One liberal analyst, with a Tulsa think tank, commented several weeks ago that Kansans were having “buyer’s remorse” over the tax cuts.
Last month, I asked Gov. Brownback about that. He told me: “I’m not having buyer’s remorse at all. We’re getting some nice early indicators of the positive effect of our tax cut stimulus. As you have noted, it only went into effect on January 1. Along the Missouri border, there are a lot of anecdotal indications of a positive impact.
“The business community is not having buyer’s remorse. They consider our tax reduction a positive pro-growth step we’ve taken in keeping with what we pledged to do.
“Now, people who use government resources have questions and challenges about the tax reduction, but that is not a surprise. When I came into office, and in the debate about this change in policy, I pointed to 30 years of data showing a consistent decline in our economic position and in business activity. There was every reason in the world to believe that decline would continue.
“The choice was really whether we wanted to continue a slow or likely accelerating decline, or get on a different path. I chose and the Legislature agreed to get on that different path.”
Speaking of neighbors, Gov. Dave Heineman of Nebraska, where the income tax rate is 6.84 percent, wants to nip and tuck at business tax exemptions, as a means to reduce — and perhaps eliminate — his state’s personal income tax. In a Jan. 15 speech, Heineman fretted that his state now has a higher personal tax levy than every one of its neighbors — Iowa, Kansas, Missouri, Colorado and Wyoming.
Texas is one of the seven states where there is no personal income tax at all. In our region, the Lone Star State may have company in that enviable status before too long. (Two other states tax interest and dividend income, but not other personal income.)
Louisiana Gov. Bobby Jindal wants to eliminate all personal and corporate income taxes in Bayou country, where the personal rate is presently 3.9 percent.
Back in the Sooner State, in an October 30 speech Oklahoma’s state treasurer, commenting on Gov. Brownback and the Republican legislature’s tax cuts for the Sunflower State, said: “He signed it and they just cut their education budget by 10 percent because the growth revenues they were projecting didn’t happen. So they’re going through a pretty tough adjustment to the budget now.”
In our late January interview, I asked Gov. Brownback if that was true. In a charitable response, he commented: “I just put out a two-year budget. In terms of state aid, K-12 education is holding steady, at a flat base in that budget. The K-12 total actually goes up some due to spending on pensions and on buildings. To be clear, spending on education has gone up every year since I’ve been governor.”
I also asked Gov. Brownback, who delivered his third State of the State address on Jan. 15, about a Tulsa World report that Oklahoma’s Republican Senate leader “does not favor a general tax cut, saying he did not want a situation such as the one in Kansas, where state agencies have been told to reduce spending 10 percent after the Legislature and Gov. Sam Brownback slashed income taxes by $2.5 billion.”
Knowing that was not exactly the sequence of events that my research found had transpired to our north, I asked Brownback to detail the approach he and the Legislature took as they established fiscal conservatism as a given in state public policy.
He replied, “The request was to every state agency, to tell us what a 10 percent cut would look like. That’s because we are trying to plan for all possibilities and we are bringing real discipline to the budget.
“Medicaid will be funded, with a slight expansion of services because of reforms we are making. We are simply not experiencing what was indicated in that comment.
“Now, to be clear, we believe there will be some dip in revenue as a result of the tax cuts, because we set out to cut taxes. We’re projecting a two-year reduction in government revenues. We’re aiming to take spending to 2010 levels over the next two years. Keep in mind that is the spending level that was in place when I came to office.”
Brownback continued, “When I came into office, we had $876.05 in cash on hand at the end of the fiscal year. We anticipate, this year, having nearly a half-billion dollars in cash on hand.
“What that means is that we’re going into what we anticipate will be a period of lower receipts with more in the bank than when I got here. At the time I took office, the state was projecting, anticipating, a $500 million hole. Instead, we expect to have $500 million in the bank.
“Things are better now than when I took over, and we expect them to get better still. There are some challenges ahead, but we’re planning for that.”
In Oklahoma, the 2012 legislative session began with high hopes of tax reductions, including Gov. Mary Fallin’s endorsement of a gradual phase-out of the personal income tax levy.
In what this writer believes was the top policy news story of 2012 for Oklahoma government, not only did that idea fall apart, state leaders delivered an “epic fail” as the tax burden remained constant and government spending increased by more than $300 million.
As the 2013 Oklahoma legislative session commenced on Feb. 4, state leaders anticipated around $500 million would be in the constitutional reserve fund, better known as the Rainy Day Fund. The Legislature will have perhaps $170 million more to spend in the next fiscal year than in this year. But state agencies have asked for $1.07 billion in increased spending.
Gov. Fallin has told reporters she will seek an incremental personal income tax reduction of some sort, but the state Chamber of Commerce has pledged to oppose most efforts to trim business exemptions and direct subsidies.
In Kansas, meanwhile, the Chamber of Commerce has been a Brownback ally.
Last year at this time, Gov. Mary Fallin told The Wall Street Journal: “Oklahoma doesn’t want to end up an income-tax sandwich.”
Oklahoma should be alert. In his State of the State address last month, Gov. Brownback said, “Look out Texas, here comes Kansas.”
NOTE: This is adapted from McGuigan’s essay that also appeared in the February 2013 edition of Perspective Magazine, monthly publication of the Oklahoma Council of Public Affairs.