By: Dave Trabert
Word Count: 393
July 24, 2012
Senate President Steve Morris’ recent claim that Kansas’ tax reform will create a $2.7 billion deficit is based on a hypothetical scenario that every legislator understands cannot occur, as a balanced budget is required by state law every year. There will be no deficits.
The deficit prediction comes from a standard static analysis that government uses, which, by design, ignores the realities of balanced budget requirements and additional state and local tax revenue that will be generated from increased economic activity. A dynamic analysis conducted by Kansas Policy Institute and The Beacon Hill Institute at Suffolk University captures that extra revenue and shows that only a one-time spending reduction of about 8.5% in FY 2014 is necessary to maintain balanced budgets and healthy ending balances. Thereafter, spending can generally increase at the same pace as revenue, which is estimated to be around 4%.
In FY 2010 – when Kansas was spending nearly $900 million less than today – General Fund spending amounted to $1,843 per-resident. That was 16% more than the states with no income tax. The key to having a low tax burden is keeping spending under control, and that’s exactly what those states do. Even following a one-time adjustment, Kansas would still be spending more per-resident than many other states and well above inflation-plus-population-adjusted levels. The sky won’t fall with tax reform – just your tax bill.
Tax reform won’t create deficits, but the KPI / Beacon Hill study shows it will create at least 33,000 new jobs and increase disposable income by at least $1.6 billion through FY 2018. Senator Morris said many more jobs are needed to make up for income tax relief, but the calculation he cited is from a group that lobbies Topeka to spend more of your money to fund an ever-expanding state government. General Fund spending is 97% higher now than in 1994, while inflation and population are only up 65%. Tax reform opponents apparently think that that gap should be even wider.
Our dynamic analysis also shows that increased economic activity prompted by income tax reform will generate at least $323 million in new local sales and property tax revenue. This growth invalidates any speculation that local tax rates would have to increase.
The ongoing battle over tax reform is driven not by facts, but philosophical differences – economic freedom and jobs or the continued growth of government.
Read a full version of this commentary in the Wichita Eagle here.