A year ago, Kansas Gov. Sam Brownback was the poster boy for the benefits of state income tax cuts. Now he's the whipping boy for a revenue shortfall because Brownback actually succeeded in cutting taxes.
In the spirited debate over proposed income tax cuts for Oklahomans at this time last year, Kansas and Missouri were cited as examples of states where tax-cutting plans would put this state at a disadvantage. But opponents of Oklahoma tax cuts warned that Brownback and Kansas were overreaching. Kansas now faces a shortfall. Its governor must find offsets for revenue losses.
As the 2012 legislative session came to a close here, the tax cutters had lost the first round. Round 2 starts now. The 2012 knockout was partly due to the unpopularity of proposed revenue offsets. Brownback and Mary Fallin, his conservative Republican counterpart, committed themselves to cutting income taxes. Brownback succeeded. But at what price?
Conservatives hailed the Kansas tax cuts as a model for fiscal policy. The state's three tax brackets were 3.5 percent, 6.25 percent and 6.45 percent. The cuts created two brackets, of 3 percent and 4.9 percent. By contrast, Oklahoma's top rate is 5.25 percent. The lower the top rate, the harder it is to argue that the rate is too high. It was an easier argument to make in Kansas.
Nevertheless, Fallin and other Republicans will likely again call for tax cuts. But they may be more circumspect this time. They could even settle for the 4.9 percent rate in effect in Kansas. What will they settle for in the way of offsets? As is the case here, Kansas is looking at curtailment of tax credits, deductions and exemptions. This is exactly what steamrollered Oklahoma's tax-cutting plans last year: Every taxpayer benefiting from credits, deductions and/or exemptions was cool to the idea that a lower overall tax rate is worth the price.
Kansas faces a revenue decline of $700 million for the fiscal year that begins July 1, compared with the current year. On the other hand, Kansans will pay less in income taxes. The state can boast that it taxes its highest earners at a lower rate than most states in the region, including Oklahoma. This will add fuel to the fire that Oklahoma must protect its flanks, sandwiched as it is between a state with no income tax (Texas) and another with a lower top rate.
Nevertheless, what's happening in Kansas is a cautionary tale. Cutting income taxes is a good thing; competitive disadvantages can't be ignored. Still, the 2012 proposals to reduce Oklahoma's top rate to 3.5 percent (as a step on the road toward eliminating the personal income tax) seem even more pie-in-the-sky today than they did a year ago.
Oklahoma's top rate of 5.25 percent is too high. But reducing it will require responsible policymaking that must include revenue offsets. A wild card in the deal is the federal fiscal outlook. Every governor has cause for concern: Averting the “fiscal cliff” merely delayed action on spending cuts. Stateline.org reports that governors and legislators must wait until at least March to learn the effects of proposed federal spending cuts — “a crucial question for states since the federal government provides about 30 percent of their revenue.”
Could it be that Oklahoma's conservative Republican government can't act on tax cut proposals because it can't get an answer from a liberal Democratic government in Washington on how soon and how much federal spending will be cut?