DALLAS -- Kansas is not the only state to experience a steep drop in income tax revenue in May, but Democrats and Republicans in the Sunflower State, in an election year, are drawing dramatically different conclusions about the cause.
With the end of the fiscal year coming in two weeks, Kansas has taken in $685 million less this fiscal year than it had by May 2013, a drop of more than 12%, according to state officials.
In May, revenues fell $217 million short of projections, running $310 million below estimates for the fiscal year.
"It's no surprise this is happening," said Democrat Paul Davis, running for governor against incumbent Republican Sam Brownback. "Economists across the political spectrum warned the governor that his economic strategy would blow a hole in the budget, putting schools and other important services in jeopardy."
Brownback didn't make a statement about the May revenue drop, but Kansas Secretary of Revenue Nick Jordan blamed President Obama rather than the income tax cuts legislators made at Brownback's behest in 2012.
"This is an undeniable result of President Obama's failed economic policies of increasing taxes and over-regulation," Jordan said in a press release announcing the revenue decline. "Our state coffers are seeing the effect of poor policy decisions at the federal level which have seen a 7.6% drop in exports and a slow rate of inventory replenishment."
Jordan cited other states that have seen tax receipts fall, including Michigan, Wisconsin, Pennsylvania and Vermont. With the exception of Wisconsin, none of the states listed had enacted tax cuts in 2013, Jordan noted.
The April and May revenue drops are widely seen as a reduction in income tax collections because of the so-called "fiscal cliff" that allowed certain federal tax cuts to expire. To avoid paying the higher rate for 2013, investors took higher income declarations for the 2012 tax year, according to analysts.
Researchers Lucy Dadayan and Donald J. Boyd at the Nelson A. Rockefeller Institute for Government cited the state tax cuts as an additional factor in a June special report.
"The situation was further complicated in states that reduced income tax rates, including Kansas, Maine, Michigan, Nebraska, North Dakota, and Ohio, where it was difficult to sort out the effects of tax cuts from declines in underlying income," they wrote. "Minnesota was the only state to increase income tax rates in 2013."
Moody's Investors Service analyst Lisa Heller said it may take a couple of months before the impact of the state tax cuts can be separated from the federal tax policies enacted by Congress.
"What we've noticed is the dropoff in revenues was quite large in proportion to its budget in Kansas," Heller said. "In Connecticut - a high wealth state - it was about $400 million, but they have a $17 billion budget. In Kansas, they're about $300 million off their revenue estimate, but they have a smaller $6 billion budget."
Moody's downgraded Kansas in May, dropping the state's issuer rating to Aa2 from Aa1. Analysts cited the state's weak economy and patchwork approach to balancing the state budget with one-time measures.
Now the state is working toward a goal of eliminating the income tax in favor of sales taxes. Heller points out that states that do not tax income are often highly rated, so the source of tax revenue is not the issue.
"Many states have been able to balance their budgets without an income tax," she said in a phone interview. "The risk is in their transition. You have to make sure there will either be compensating revenues or reduced expenses."
If state revenues match projections for June and the next 12 months, it will be left with an ending balance of $56 million by the end of fiscal year 2015, according to a report from the Kansas Legislative Research Department. If revenues continue to drop, the situation could become more serious.
"We'll finish this year with several hundred millions of dollars cash on hand," Brownback told the Wichita Eagle. "So, we're going to be in fine shape."
