Two years ago as part of the fiscal cliff deal, members of Congress sensibly allowed a subset of the Bush tax cuts for the wealthy to expire, including an increase in taxes on capital gains. Many wealthy investors, who have the benefit of tax advisors, chose to sell stocks in 2012 rather than wait for potentially higher federal income tax rates in 2013. The result was a boost in federal and state income tax collections in fiscal year 2013.
To be clear, the fiscal cliff deal’s anticipated tax hikes on the investor class didn’t increase the amount of revenue from capital gains income—it just shifted that income from fiscal year 2014 to fiscal year 2013. This meant that state lawmakers needed to plan for an extra shot of revenue in 2013, and an equivalent amount of missing revenue in 2014.
Most states planned accordingly. In states such as California, this basic budgeting matter hardly caused a ripple: the Golden State experienced a surge in personal income tax revenues in April 2013 and a large decline this year. But, they saw the decline coming and when the dust cleared, the state actually brought in more money from personal income taxes than expected in April.
A handful of other states, however, didn’t plan as well and are attempting to blame their failed tax policies on the fiscal cliff deal. Kansas is a prime example.
Two years ago, Kansas Gov. Sam Brownback declared that his plan to repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two successive tax cuts that disproportionately benefited the richest Kansans, assuring the public these cuts would pay for themselves. Now he is facing a barrage of criticism over growing evidence that state tax revenues are declining in the wake of these cuts.
The pressure seems to be getting to the Brownback administration: earlier this month, Brownback’s revenue secretary, faced with a 45 percent decline in April tax revenues relative to the same month in 2013, called the month’s revenue slide “an undeniable result of President Obama’s failed economic policies.”
Kansas experienced the same revenue bubble in 2013, and the same trough in 2014, as did California and many other states. The state Department of Revenue’s April 2014 tax report notes that April 2013 revenues “increased dramatically from the previous year, about 53 percent,” due to accelerated capital gains encouraged by the fiscal cliff deal. In that context, the reported 45 percent decline in April 2014 is not only predictable, it sounds like a pretty good deal.
So why is Gov. Brownback’s administration citing this income-tax timing shift as evidence that President Obama’s policies have caused “lower income tax collections and a depressed business environment?” And why are governors in New Jersey and North Carolina making similar claims? In both Kansas and the Tarheel State, the governor is under pressure to defend the affordability of recently enacted income tax cuts.
Pinning the blame for revenue shortfalls on the fiscal cliff deal deflects scrutiny from state tax cuts costing more than advertised. In New Jersey, as the Tax Foundation has noted, Gov. Christie has been accused of using wildly optimistic revenue forecasts as part of his 2013 reelection campaign, and now he has some explaining to do about why his projections were so wrong. Once again, the Obama Administration serves as a convenient scapegoat for poor fiscal management decisions by state leaders.
But the news is not all bad out of Kansas: in a rhetorical flourish that would make North Korea envious, just one month before the Kansas Department of Revenue blamed President Obama for April’s decline in tax revenues, they explained a March increase in tax revenues as evidence that “ [w]e’re seeing the Kansas economic engine running.”
Kansas is, by all accounts, in a real fiscal jam. The ballooning cost of Brownback’s tax cuts and a recent state Supreme Court mandate that Kansas spend additional money on schools has made the task of a balanced budget very difficult for state lawmakers. But if Kansas lawmakers are in a fiscal hole, they need look no further than the state capitol to determine who is wielding a shovel.