By NEIL KING JR. and MARK PETERS
Even if he doesn’t enter the race himself, this state’s Republican governor, Sam Brownback, is determined to play a starring role in the next presidential election.
How? By turning Kansas into what he calls Exhibit A for how sharp cuts in taxes and government spending can generate jobs, wean residents off public aid and spur economic growth.
“My focus is to create a red-state model that allows the Republican ticket to say, ‘See, we’ve got a different way, and it works,’ ” Mr. Brownback said in a recent interview.
Coming off the largest tax cut in state history on Jan. 1, Kansas is now on the leading edge of a growing but still largely untested quest among conservative governors to create growth by dramatically revamping state tax codes.
The Brownback experiment is stirring both praise and anxiety among Kansas conservatives even as it helps spark similar overhaul proposals in the GOP-led states of Indiana, Louisiana, Nebraska, North Carolina, Ohio and Oklahoma.
See interactive map of Republican states with super majorities here
The focus on fiscal innovations in the heartland comes as conservatives nationally seek ways to revive the GOP’s standing in the aftermath of its stinging election losses last year. Bruised by the continuing budget battles in Washington, where divided government has led to near-gridlock, top Republicans nationally are holding up Kansas and other GOP-dominated states as examples of what the party might accomplish if left to its own devices.
Mr. Brownback recounts how Senate Minority Leader Mitch McConnell reacted when the two talked recently about the work under way in Kansas.
“Mitch said, ‘This is exactly the sort of thing we want to do here, in Washington, but can’t, at least for now,’ ” Mr. Brownback said. An aide to Mr. McConnell confirmed the conversation.
In some of the GOP-led states, governors are looking to slash income taxes while increasing state sales taxes, betting that formula will be better for the economy. Others want to turn projected surpluses from a slow but steady recovery in the national economy into tax cuts. Mr. Brownback is making a riskier wager: that sharp cuts in income-tax rates will pay for themselves by igniting growth. The supposition is that a tax cut will spark more growth, hence more revenue from all taxes, including sales taxes.
Mr. Brownback has boasted that his state is set to go head-to-head with Texas, which has neither a personal nor corporate income tax, in luring new businesses and residents. Lawmakers in other states, in turn, are worried about keeping pace with Kansas or other neighboring states.
“If we don’t do this, we continue to see the prospect of falling further and further behind,” said Phil Berger, the Republican president of the North Carolina Senate.
The overhauls have reignited a long-standing debate over the efficacy of tax cuts in generating economic growth. Proponents point to a record of growth in many of the nine states, such as Texas, Tennessee and Florida, that have no state income tax. Skeptics note that the U.S. economy sputtered for much of the past decade, despite the tax cuts under President George W. Bush.
Either way, economists agree it could be years before clear conclusions can be drawn from the experiments under way in Kansas and other states.
If successful, the combined tax cuts and pared government spending could reignite slumbering state economies and draw in new residents, while positioning Mr. Brownback and governors such as Louisiana’s Bobby Jindal and Indiana’s Mike Pence for potential White House bids.
But if they fall short, the policies could leave Kansas and other states scrambling to fill big budget holes for education and social services, while driving investors to other states.
The tax gambles under way in the red states contrast sharply with proposals put forward by some Democratic governors. The governors of Minnesota and Massachusetts have proposed raising income taxes while cutting the sales tax. The trend promises to create unusually stark divisions between conservative and liberal states.
Elections in November left all but 13 states with one-party control of both the legislature and the governor’s office, the most in decades. Fully half of all states now have veto-proof legislative majorities, making intraparty disagreements the chief potential threat to legislative agendas.
In Kansas, about a dozen centrist Republican lawmakers were targeted by conservatives and voted out of office last year, so Gov. Brownback now enjoys the backing of an overwhelmingly conservative legislature. He is savoring the moment.
“We’ve got a series of blue states raising taxes and a series of red states cutting taxes,” he said in his sunny, cavernous office on the second floor of the Kansas capitol. “Now let’s watch and see what happens.”
The governor may have few Democrats to worry about—Republicans hold a four-to-one advantage in the state legislature—but his proposals have created fissures in the state’s GOP, underscoring that aggressive efforts to pare government and cut taxes can be tough even in a Republican-dominated state.
Mr. Brownback, who made a brief bid for the White House in 2008 while still in the U.S. Senate, signed a steep income-tax cut last year, the first step in what he hopes will be the eventual elimination of the state’s income tax, which still generates about 40% of the state’s general-fund revenue. He has chopped thousands of state jobs, merged government departments and removed thousands of Kansans from the welfare rolls.
For guidance, Mr. Brownback has leaned on Reagan-era supply-sider economist Arthur Laffer, as well as on Americans for Prosperity, a conservative group funded by the Wichita-based Koch brothers. One of AFP’s top consultants, who drafted mock state budgets while working for the group, is now the state’s budget director.
But the governor faces an array of challenges. His income-tax cuts, which took the top rate from 6.45% to 4.9% at the start of the year and are targeted to hit 3.5% by 2017, are projected to leave a significant hole in next year’s state budget, which starts in July.
The official state economic-forecasting agency predicted last fall a drop of $700 million in revenue in the next fiscal year, equivalent to about 12% of this year’s budget, with the decline growing steeper after that. Mr. Brownback’s budget proposal for the coming year, released in January, put the figure even higher, at $800 million, or four times what the state spends annually on all its prison facilities.
To make up for the revenue drop, the governor is pushing to preserve what was meant to be a temporary increase in the state sales tax, and to eliminate two popular deductions, including the state write-off for home-mortgage interest payments. Those moves would raise about $600 million next fiscal year. He also wants to transfer more than $100 million from a state highway fund to cover other expenses.
Estimates prepared by the state’s legislative research department predict that, even with the steps Mr. Brownback proposes, Kansas is on track to be short of money. The estimates suggest that the state will need to lean on its reserves in the coming years, and lawmakers by 2017 will be forced to make $780 million in spending cuts to prevent a deficit, which isn’t allowed under Kansas law. A Brownback aide said the forecasts don’t take into account the beneficial impact of the tax cuts.
Still, Mr. Brownback faces stiff opposition to keeping the sales tax at its current rate of 6.3%, not only from the Kansas Chamber of Commerce and many conservative lawmakers, but also from Democrats in the Legislature. The rate is set to fall back to 5.7% in June. A trade group for real-estate agents is lobbying strongly against cutting the mortgage-interest deduction.
At the same time, a recent state-court order in a long-running dispute over state support for the schools said that Kansas was underfunding public schools by more than $400 million a year—a ruling Mr. Brownback and GOP lawmakers are now pushing to overturn.
Mr. Brownback and others believe the tax cuts will eventually pay for themselves by drawing in new businesses and stirring job growth.
The state forecasting body remains unconvinced. In a November report, the group said over the long term, “new economic growth” would likely help offset just “a portion of the revenue loss.”
Mr. Brownback and his top aides acknowledge they have taken a leap based partly on faith. “Our out-year forecasts are pretty much guesses,” said the governor’s revenue secretary, Nick Jordan.
Mr. Brownback said he hopes some new oil exploration in the state will generate unforeseen revenues. Others in his administration point to signs of a turnaround in the aviation industry around Wichita.
Talk of eliminating the income tax altogether has drawn applause from conservatives in the statehouse, who say it will help Kansas compete with low-tax states like Texas. But the proposal has also stirred dissent from centrist ranks of the Republican Party.
Republican critics worry the state’s schools and infrastructure will suffer. Others are concerned that an over reliance on the state sales tax may shift too heavy a burden onto the less affluent.
“I fear for what the Republican Party is doing to the country and to Kansas,” said Jean Schodorf, who lost her seat in the state Senate last year after decades as a Republican officeholder. “All of what we have built in this state is in jeopardy.”
House Speaker Ray Merrick, a veteran GOP lawmaker and Brownback ally, praises the effort to eliminate the state’s income taxes as “a bold plan,” but says the state has to avoid being rash. “The devil is in the details,” he said in an interview. “We don’t need to rush this.”
Similar strains are showing in other GOP-controlled states looking to follow Kansas’ lead.
In Indiana, days after Gov. Pence was sworn into office in January, he proposed reducing the individual income-tax rate to 3.06%, from 3.4%, over two years. The former congressman, who was a member of the House Tea Party caucus, is looking to make a mark for himself after eight years of tax cuts and budget cutting under former Gov. Mitch Daniels.
“Because we can afford to cut taxes for every Hoosier, I believe we should,” the new governor said in his first speech to the Legislature.
But leaders in the Legislature, where Republicans have large majorities in the House and Senate, haven’t been quick to back his plan. Some question whether it makes sense to cut taxes at a time when the economy still appears fragile and the federal government is passing on new costs to the states.
Indiana House Speaker Brian Bosma said his priorities are more focused on ensuring fiscal stability. Nor is he convinced an income-tax cut will provide the promised boost in economic growth. He wants to restore some of the government services cut during the recession, while making investments in transportation and education.
“My encouragement to everyone is to look at long-term sustainability and not just an election cycle,” Mr. Bosma said.
Over the past eight years, former Gov. Daniels cut corporate income taxes and began the phaseout of a state inheritance tax. The Legislature required any large surpluses to be split between funding state pensions and a tax rebate.
Like Gov. Pence, Oklahoma Gov. Mary Fallin wants to turn projections of a surplus into a tax cut. On Monday, she proposed cutting the state’s top income-tax rate to 5%, from 5.25%, a proposal that is smaller and simpler than one that failed a year ago despite large Republican majorities in both the House and Senate.
“This is not the last tax cut we will see from my administration,” Gov. Fallin told legislators on Monday.
Other red states are considering similar proposals or even grander plans to eliminate the income tax.
Nebraska Gov. Dave Heineman is pushing to end the state’s income taxes and offset the lost revenue by broadening the sales tax to more items, while Gov. Jindal of Louisiana is discussing an end to the state’s personal and corporate income taxes. He is looking to replace the revenue by raising the sales tax and broadening it to more items.
Republicans are weighing similar proposals in North Carolina, where developments will be watched all the more closely considering the state’s status as a presidential battleground state. Gov. John Kasich in Ohio, another battleground state, proposed on Monday cutting income taxes by 20% over three years.
In Kansas, Gov. Brownback compares what is happening on the tax front in his and other Republican states to the GOP-led welfare overhauls in Wisconsin and Michigan in the late 1980s and early 1990s, which paved the way for a sweeping national overhaul in Congress in 1995.
“There will be no model for what we want to do nationally until we can examine how several states have done it first,” he said.
A version of this article appeared February 5, 2013, on The Wall Street Journal
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