Kansas Budget Director Calls for End of State Income Tax

Kansas Budget Director Calls for End of State Income Tax
August 17, 2011

Kansas Budget Director Steve Anderson hopes lawmakers this year will pass proposed legislation to gradually eliminate the state’s personal income tax.

A similar attempt to end the tax stalled in the state Senate late year. In addition to eliminating the personal income tax, the current bill would raise sales and property taxes and cap state revenue at the 2010 level. It would also reduce corporate taxes from 4 or 7 percent to 3.5 percent.

Budget & Tax News recently spoke with Anderson about efforts to cap state revenue in Kansas.

State as ‘Business Enterprise’

BTN: Why are you considering ending the state income tax? What benefits do you expect the citizens of Kansas to enjoy if this legislation passes?

SA: Let’s just think about the state as a business enterprise. When you think about a business, you look at all of the factors—revenues in, expenditures out, debt, payments. And if we look at the State of Kansas, and we look over the last 10 years or even the last 40 years, what we see is that there was a net outflow.

I’ll give you an example. From 2005 to 2009, according to IRS migration data, approximately three-quarters of a billion dollars of annually recurring income left the state.

So when you look at that, you think, from a revenue perspective, in order to keep my clients, i.e. my citizens and their income, it looks like the factor that most positively correlates to that is the income tax. In fact, when you look across the whole country and look at Census data. . . . it’s interesting the dispersion of high-tax and low-tax states.

The large gains have largely been in low-tax states. In fact, the zero income-tax states are largely grouped in the upper 50 percent, and you look at the high income-tax states and it is the opposite.

So when you get those factors, our thought process is that we are a state that is well positioned to do business; however, we’ve created a climate that is not conducive to doing business.

Corporate Tax Cut

BTN: Why also try to cut the corporate tax? 

SA: It is a short drive [from Kansas] across the panhandle of Oklahoma to Texas, the difference being that when I jump that 120 miles, all of a sudden I’m losing $6.45 for every hundred dollars I make if I stay in Kansas. For a short jump across, I set up my business, and I am now keeping that in my pocket.

So that’s part of the driver of that—the relationship we’re looking at is how much you can cut initially to become competitive regionally.

We’re making progress, but what we’re looking at is a relatively flat revenue growth, and it’s been that way in the past, even in decent economic times. And we’re trying to correct that by letting business know that not only are we going to cut income taxes, but our ultimate goal is to make it zero.

I think that’s important because when you go to recruit, when big companies look at moving a large facility, it’s a major operation. That commitment is a two- to five-year study process in movement, so when they get there, they want to know they have an environment that’s either going to be stable or improving. From our perspective, if we can get below, for example, Missouri’s individual income tax rate . . . they’re at 6 percent and we’re at 6.45 percent.

Kansas vs. Missouri

BTN:  Missouri also repealed its anti-business franchise tax this year. Do you think that provides further incentive to eliminate the income tax and prevent corporate border bleed in Kansas?

SA: The competition is ongoing. It goes back a long way with Missouri and Kansas, back to the Border Wars and Quantrill’s Raiders. [Editor’s note: Quantrill’s Raiders were a loose band of pro-Confederate rangers during the Civil War who fought along the Kansas-Missouri border under the command of William Clarke Quantrill.]

We’ve been in competition for a long time, and we’ve been losing that competition. I am privileged to work for a governor [Republican Sam Brownback] who really gets it. You know, many politicians don’t understand the business relationship between revenues and expenditures. This governor certainly understands it in a way that is very impressive.

When you talk to him in private, his ability to drill down to the detail is far and away above your average politician. He understands the business of government.

Different Tax Cut Approaches

SA: [In terms of cutting taxes], we’ve got six different approaches. Each one takes a slightly different path. Our thought process is to put them in front of the governor, and we have a small group of businessmen who are going to take a look at it, and then bringing in some of the leaders of the House and the Senate to consider what we believe is the most prudent way to go forward.

I think all of them will take a pretty big whack off our top end—that 6.45 percent—which is now our top individual income tax rate. Some of them do it by taking some initial exemptions off; some of them are strictly a smaller cut with no change in exemptions, and then a cut on expenditures.

Spending Control

SA: Remember, this is more than just revenues. We’re working hard on expenditures. When we came into office [in January], the last fiscal year had ended with $826.05 in the bank, which I think is just staggering. Even an individual getting down to $826.05 in the bank is disturbing, and when you consider a state with approximately 2.9 million citizens allowing themselves to be in that position. . . .

We were looking at a $550 million dollar budget hole, and a short-term financing mechanism that was $750 million dollars. Now, in just the course of six months, we’ve fixed the $550 million dollar budget hole, we ended the [fiscal] year with approximately $228 million dollars in cash, and we reduced the $750 million to $600 million.

BTN: Could you detail specific initiatives you’ve taken to cut back spending?

SA: If you look over the last decade, Kansas overspent during the good times, and in that overspending we grew ourselves to the point that I think the latest edition of Rich States, Poor States says we are 48th in the number of government employees. In other words, we’re the third-highest state in per-capita government employees. We need to draw that down, focus on essential services, and we’ve been in that process.

I think you’ve seen how, if you’ve followed in the news, even drawing something down as nonessential in hard economic times as the Arts Commission has been a difficult thing to do.

BTN: What other measures have you taken that have been successful at cutting spending so far? I know the Arts Commission cut was difficult to get people on board with.

SA: That was actually a minor one that has gotten most of the attention. Really, what we’ve done is we’ve adapted the indirect overheads and the direct overheads. Now let me give you an example of the indirect overheads. These are the ones that the government is terrible at, they just aren’t very efficient in this way.

Information technology: When we did our survey of the state servers we found out that we’ve got 5,400 servers spread across the state—and we’re not talking the small servers, we’re talking large servers—but the state tends to overbuy because the thought process is always, “Well, let’s make sure that we are completely covered.”

Instead of thinking about what we need, they think about protecting themselves only, so we end up overbuying. We found that the server usage ranged from 10 percent to 30 percent of capacity. In other words, we badly overbought. So, we had to consolidate the IT down. We’re getting some significant savings there.

A great example of how you can cut things is to start thinking about [the government] as one component unit. Now, we’ve been lucky enough to have a governor who is very firm on “we’re all a team.” And I think that’s important, that you have that team concept and you bid on things together.

A good example would be your FedEx contracts. You need to look at how many you do as a whole of the state unit instead of the idea that you’re going to have to pay the going rate. You negotiate with them. You say, “Okay, here’s my usage level, and I’d be paying you 20 percent below that. Can we make a deal?” And I think we’ll find that the industry is very interested in talking to us about things like this.

These are things that business has done for a long time, but during good times government doesn’t think about squeezing costs.

Governor ‘At the Helm’

SA:  A lot of people think [this initiative] is being driven by the financial end of the government. That’s not true. The governor is very much at the helm. He understands the relationship between state revenue-supported debt and your expenditures. That’s one of the things that’s always buried up in the financial statement. That is a part that is poorly understood by many elected officials.

I’m a very, very minor part of this. There are some very bright individuals driving this train, and I think that’s part of why I’m very optimistic that we’re going to have a structure that makes Kansas competitive in all the contiguous United States.

BTN: Best of luck with this initiative. It sounds like things are off to a good start.

SA: Keep your eye on Kansas. I think when you see the budget come out in January of this next year, there are going to be a lot of people who sit up and take notice.

Elizabeth Henderson (EHenderson@heartland.org) is an assistant legislative specialist at The Heartland Institute.