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Kansas Gov. Sam Brownback pumps his fists as he greets the crowd on Aug. 5, 2014, at a Republican gathering in the Overland Park, Kan. / Chris Neal, AP

LAWRENCE, Kan. - Art Hall remains calm about the whole thing.

It will take 10 years, he says. It's too early to tell.

Everything may be serene in the economics lecturer's small, windowless office on the University of Kansas campus, but outside, Kansas is roiling.

Discontent with an extreme tax cut passed in 2012 has grown. What Republican Gov. Sam Brownback said would result in a "shot of adrenaline" to the state's economy has so far brought large revenue declines.

Kansas' credit rating was downgraded Wednesday. And Brownback is now engaged in a competitive race for re-election against a Democrat in a heavily conservative state.

A year ago, Missouri lawmakers cited Kansas' tax cut as a reason to take their own action on taxes. Missouri passed its own, less radical tax cut.

But in light of what is happening in Kansas, the prospect of more cuts - the legislature passed a number of tax breaks in the waning hours of the session - some worry that similar problems loom for Missouri.

The Missouri Budget Project, a nonpartisan group that leans to the left, says the tax breaks will harm the ability of the state to fund services at this year's levels going forward. The governor says the tax breaks could cause an annual loss of $425 million in state revenues and $351 million in local revenues.

"We are in a pretty dire revenue situation right now, and I'm not sure folks fully grasp the severity of the situation," Budget Project spokeswoman Traci Gleason said.

But tax-cut proponents insist there is a silver lining in Kansas - a thin one but enough to keep alive the efforts to cut taxes here.

Wrong focus

In 2012, Kansas passed a sharp income tax cut. Income tax on small business was eliminated, and the highest personal income tax bracket dropped to 4.9 percent from 6.45 percent. Right now in Missouri, the top personal income tax bracket is 6 percent.

The Kansas law also increased the standard deduction for married individuals filing jointly from $6,000 to $9,000.

In 2013, the legislature passed another measure to cut taxes even more. Now, the top income tax rate will ultimately be 3.9 percent by 2018. Additional income tax cuts may occur after 2018 if the state's general fund grows by more than 2 percent over the previous year.

The state has been losing revenue. In April, May and June, incoming revenue fell short of projections by $334 million. Kansas had a bit of good news in July when revenue beat expectations by $1.6 million.

Hall wants to put the policy in the context of a longer-term effort to eliminate the income tax in Kansas.

"This is a long-term competitive positioning play," Hall said of the tax cuts.

Hall said in a perfect world, income tax rates would be ratcheted down in a smooth way, but politicians also sought faster growth. Those two dynamics are now at play in Kansas' current policy.

A key piece of the 2012 tax cut was eliminating taxes on pass-through business income - basically profits passed from a business to an individual owner. Hall said creating new businesses is the key to jump-starting economic growth. Eliminating taxes on pass-through income is supposed to do just that.

A report produced by the Kansas secretary of state released in February shows the number of new business filings has increased since the tax cuts passed in 2012. According to the report, there were 13,646 new filings in 2011. That jumped to 15,008 in 2012 and 15,469 in 2013.

Annie McKay, director of the Kansas Center for Economic Growth, a Topeka-based think tank opposed to the Brownback tax cuts, said the number of new business filings does not tell the whole story. The number of business dissolutions and forfeitures is also up.

In total, the number of net new businesses actually declined between 2012 and 2013, the group said.

"When you talk about the number of businesses left standing at the end of the year, when the dust settles, the number is not at a record high. In fact, it's below where we found ourselves before the recession," McKay said.

Missouri answers Kansas

Tax-cut supporters in Missouri have long been watching Kansas.

Back in March 2013, Republican state Sen. Will Kraus wrote to constituents, arguing the need for a tax cut.

"If Missouri does not fundamentally change our tax policy, we will fall behind states like Kansas, Oklahoma and other neighbors who are reforming their tax systems."

Over the past two years, Missouri lawmakers have been trying to change tax policy:

Republicans in 2013 passed a bill cutting income tax rates, but Gov. Jay Nixon vetoed it. Nixon drew attention to provisions in the legislation that proved unpopular, such as language that ended a sales tax exemption of prescription drugs. In September 2013, Republicans tried and failed to override Nixon's veto.

This spring, Republicans once again passed a tax cut. Nixon once again vetoed the bill, but lawmakers overrode the veto, forcing the legislation into law. The new law will gradually cut Missouri's top individual income tax rate starting in 2017 from 6 percent to 5.5 percent and make the state just the third in the nation to offer a special business-income deduction on personal tax returns. But the incremental tax cuts will occur only if Missouri's revenues keep growing.

Nixon vetoed a series of bills passed in the final days of the 2014 session that he says would gut upward of $800 million annually in tax revenue through several sales tax exemptions for particular groups and industries. Lawmakers could try to override the vetoes in September.

With weak general revenue growth since 2008 combined with the tax cuts scheduled to go into effect in 2017, the Missouri Budget Project says says is approaching a "tax cut cliff."

Ray McCarty, president of Associated Industries of Missouri, defends the cuts, saying the state had crafted its business income tax deduction with guarantees in place to protect revenue, something Kansas did not do.

"Frankly, we're just going to have to wait and see how it plays out," McCarty said.

Kansas credit woes

Anger over the tax cut in Kansas has Brownback fighting for his job.

A second major bond-rating agency Wednesday downgraded its credit rating for Kansas, undermining Brownback's effort to tout an economic comeback as he kicks off a fall re-election campaign after a narrower-than-expected GOP primary win.

Standard & Poor's announced it dropped the state's rating from to AA from AA+ and downgraded the rating for bonds backed by annual legislative appropriations of state tax dollars to AA- from AA.

The cuts - worth more than $4 billion collectively over the six-year period ending in June 2018 - are a key issue in Brownback's race for re-election against Democratic challenger Paul Davis.

Davis has proposed freezing the tax cuts in place in January, indefinitely postponing more than half of the total cuts scheduled through mid-2018. He said the S&P downgrade shows "the governor's economic experiment has failed."

Results from Tuesday's Republican primary suggested some Republicans have misgivings, too. Brownback's opponent, Jennifer Winn, a Wichita-area businesswoman, received nearly 37 percent of the vote after spending less than $14,000 through late July and running on a platform that included legalizing marijuana.

Missouri's tax changes have caused much less upheaval so far. There is little indication that Republicans will lose many seats to Democrats in November.

Missouri will elect a new governor in 2016. If the Budget Project's so-called "tax cliff" comes to pass, tax policy may play a large role in the gubernatorial race. Continued revenue problems in Kansas may also sour Missouri lawmakers on further tax changes. However, a Kansas turnaround, if it happens, could empower those arguing for further tax reductions.

"One of the benefits you all have is being able to sit back and watch the outcomes from our unprecedented cuts," McKay said. "You have time, we don't."

Contributing: The Associated Press



Copyright 2014 USATODAY.com

Read the original story: Tax-cut turbulence in Kan. buffets neighboring Mo.

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