Critics recently accused the Department of Revenue of “misrepresenting” research about the state’s revenue shortfall in April and May.
We at the Department of Revenue stand behind our prior statements contained in our April and May tax receipts reports. We have established metrics to track results and limit speculation. These are part of our contribution when we meet with the Consensus Revenue Estimating Group.
Instead of speculative guessing and accusations here is the analysis we’ve used that shows the effect capital gains shifts from tax year 2013 to tax year 2012 had on Kansas tax receipts.
Many sources have highlighted the difficulties experienced by states in forecasting the tax year 2013 revenue drops due to the federal tax policy changes. Just this week the Federation of Tax Administrators reported for January through April 2014, based on data from 35 states, total individual income tax collections, as well as estimated and final payments, all showed revenue drops.
While the April and May revenue receipts are a concern, this is a temporary issue and should not distract from Kansas’ many positive indicators of economic progress: unemployment is down from 6.8 percent in 2011 to 4.8 percent as of April 2014 and the state had two record years in new business filings.
Starting January 2013, Kansas income tax rates decreased 14 to 24 percent. The corresponding decrease in withholding taxes was factored into subsequent consensus revenue estimates. Due to the rate reductions, in 2013, we anticipated a 15 percent drop in withholding and saw a 13.6 percent drop. January 1st of 2014 there was another reduction in income tax rates of 10 percent and we anticipated an additional 5 percent drop in withholding, and for the first five months we have only seen a 4.2 percent drop. The money didn’t disappear; Kansans have more money in their pockets.
There are two primary indicators that show the revenue drop in April and May 2014 is attributable primarily to declining capital gains income. The state saw an 11.1 percent increase in federal adjusted gross income reported on tax year 2012 returns, compared to the prior tax year. Kansas income taxes are determined using the federal adjusted gross income amount as the starting point, subject to certain modifications. The federal adjusted gross income amount is not affected by any Kansas tax policy changes. With the tax year 2013 returns received to date, the total federally adjusted income amount has fallen 22 percent from the 2012 high.
Balance due payments (final payments)increased for tax year 2012 by 19.8 percent but fell 47 percent in tax year 2013 compared to 2012. These payments are primarily attributable to capital gains and dividends income.
We issued our April and May tax receipts reports after the April 17, 2014 meeting of the Consensus Revenue Estimating Group, which develops the official revenue forecasts on which the State Budget is built. This group meets twice a year, in November and April, to forecast revenues for the current and next fiscal year. At the time of the April meeting, our tax receipts were exceeding the November 2013 forecast for fiscal year 2014 revenues by $130 million. As discussed above, our withholding tax receipts were also performing well. At that meeting, the group increased the FY 2014 forecast for individual income tax receipts by $25 million.
There have also been allegations that the Department underestimated the impact of the non-wage business income tax exemption.
Based on tax returns processed so far, we calculate that businesses have saved between $140 and $150 million in Kansas income taxes because of the non-wage business tax exemption, which at this point is less than the $160 million that we previously projected.
Ninety-eight percent of Kansas businesses are 100 or fewer employees. Eliminating non-wage business taxes gives these owners needed capital to reinvest in their businesses through new employees and equipment.
As with all tax years, we won’t have the final figures until all returns are processed. This will not happen until after the October deadline for people who filed extensions. Only then will we be able to do a comparison with the prior year.
In November, once the full picture is known, the Consensus Revenue Estimating Group will reconvene and make any necessary adjustments to the estimates upon which the budget will be based.
Nick Jordan is the Kansas Secretary of Revenue.