A warning to Arizona on income-tax cuts: 'Don't do what Kansas did'

The “Kansas experiment” of eliminating the income tax is a failure that Arizona would be wise to avoid, participants at the launch of a new economic-policy think tank were told Thursday.

“The moral of our story is ‘Don’t do what Kansas did,' " said Duane Goossen, who ran the Kansas state budget office for 12 years. The result of eliminating the income tax on small business and chopping down the income-tax rate has been disastrous, he said.

“It’s a Dumpster fire, it’s a real crisis," said Goossen, who came to Arizona to help kick off the opening of the Arizona Center for Economic Progress.

Ducey goal: Zero income tax

His warning comes as Gov. Doug Ducey is putting the finishing touches on his State of the State speech amid speculation about how he will further his goal of eliminating Arizona's income tax.

Goossen, along with Annie McKay of Kansas Action for Children, said Kansas' experience shows tax cuts have not triggered the economic and job growth that Gov. Sam Brownback promised when he signed a wide-ranging tax-cut bill in 2012.

“We’ve actually been losing folks, because of reduced opportunities and reduced quality of life," McKay told the estimated 75 people who gathered to mark the opening of the Arizona Center for Economic Progress.

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The center is a project of the Children's Action Alliance. The alliance's president and CEO, Dana Wolfe Naimark, said Ducey's continued devotion to his campaign pledge, along with the Monday opening of the next legislative session, seemed like a perfect time to bring some perspective on Kansas.

There were no lawmakers in attendance, and the audience skewed heavily toward representatives of groups that have advocated for increased state investment in education, infrastructure and social services.

Ducey defends policies

Ducey, in a separate interview, said it's unfair to compare Arizona with Kansas, even though both states are led by governors who have said they want to eliminate the income tax.

"I think to point to a state and to say that’s going to be what Arizona looks like and not take into account what we’re doing inside the state, and the policies that we’ve moved forward ... is apples and oranges," Ducey said. He said the moves he has made to make Arizona more attractive and to craft better tax policy will produce a different result than Kansas.

And, Ducey added, he looks more to states like Florida, Texas and Tennessee as models on tax reduction.

In his two years in office, Ducey has made modest cuts as state revenues have been strained. In his first year, he made permanent a policy to adjust the state's tax brackets for inflation. That was estimated to save residents and businesses $31 million in income tax. Last year, he signed a bill that reduces corporate taxes by $8 million by allowing companies to accelerate the depreciation schedule on equipment.

Kansas cut deep and quick

In Kansas, lawmakers cut the income tax by 25 percent in the first year of a multiyear tax package, and eliminated the income tax on an estimated 191,000 small businesses. They also approved a plan that continues to reduce tax rates.

The result: a steep drop in state tax collections, leading to nine rounds of budget cuts in the last five years.

“We were told we were on a march to zero, and we would not stop until income taxes were entirely eliminated," said Goossen, who was a Democratic state representative in the Kansas Legislature for seven terms before joining the budget office.

A big gap opened between the state's expenditures and money coming in from tax collections. To compensate, lawmakers passed a number of sales-tax increases. Those hikes brought only partial relief and left Kansas with the highest grocery tax in the nation, McKay said.

The sales taxes hit lower-income Kansans the hardest, compounded by the loss of tax credits for such things as low-income families, renters and dependents, McKay said.

Backlash at the polls

McKay said the fallout finally got people's attention,when they realized the sterile budget numbers translated into things like no funding for early-childhood education and the loss of meals on wheels for homebound seniors and people with disabilities.

The tide started to turn, somewhat, when Brownback stood for re-election in 2014. He won, but his 4-point margin of victory was a shadow of the 31-point landslide he racked up in his first run. Last fall's legislative election brought more fallout: 14 Republicans who backed the Kansas experiment lost in primary races, and another seven were ousted in general-election races.

The plan that calls for continued tax reductions is still on the books, but has been frozen until the state's financial picture improves.

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It's unclear if that will happen anytime soon. The income tax that used to generate about half of the state's money is now down to 40 percent. Since December 2012, the year the tax cuts hit, job growth in Kansas has been 2.4 percent, compared with 6.9 percent nationally. And a state budget surplus that stood at $709 million in 2013 had been whittled down to $36 million by 2016.

"The pitch to cut taxes sounded so good," Goossen said. "But now they’re in a position of having to raise taxes and cut more just to survive.”

Reach the reporter at maryjo.pitzl@arizonarepublic.com and follow her on Twitter @maryjpitzl. Republic reporter Yvonne Wingett Sanchez contributed to this article.