Better Service, Better Price Balancing Tax Reform with Quality Service

1. Better Service, Better Price Balancing Tax Reform with Quality Service Dave Trabert President, Kansas Policy Institute

2. Low-Burden States Outperform Source: Bureau of Labor Statistics; Bureau of Economic Analysis; Census Bureau; Tax Foundation

3. Kansas Loses AGI to States with Lower Tax Burden Source: IRS, Tax Foundation

4. Controlled Spending = Low Taxes • Unusual amounts of severance tax or tourism isn’t the secret to low taxes. States could be awash in oil revenue and still have a high tax burden if they spent more. • Low-burden states are large, small, coastal, inland, northern, southern, with and without plentiful natural resources…and they all keep spending under control.

5. Controlled Spending = Low Taxes Source: National Assoc. of State Budget Officers, Census Bureau. All state funds excluding federal funds and spending associated with bond issues.

6. 2012 Spending Per-Resident (budget) Source: National Assoc. of State Budget Officers, Census Bureau. All state funds excluding federal funds and spending associated with bond issues.

7. Kansas Spent $25 Billion (All Funds) above Inflation & Population Growth Source: BLS, Census, Kansas Legislative Research Fiscal Facts

8. Less Spending, Not Less Service • The goal is to provide the same or better service at a better price. • Across-the-board cuts aren’t the answer. Customers won’t come (or stay) for lower prices and lousy service. • Better Service, Better Price implementation requires leadership and full cooperationfrom everyone involved.

9. Managing the Transition • Thoughtful, effective spending reduction takes time. • Sales tax increase and/or elimination of income tax deductions aren’t necessary. • Multiple cash options exist to ‘buy time’ while implementing a comprehensive spending review.

10. Cash Options to ‘Buy Time’ • State agencies began FY 2013 with $3.4 billion in positive-balance unencumbered cash reserves. Some is definitely not available but only a small portion is needed to balance the budget. • General Fund balance was $504 million. The rest is scattered across 1,460 other state funds.

11. Cash Options to ‘Buy Time’ • Don’t increase sales tax transfer to the highway fund. • $325 million in sales tax will be transferred to the highway fund this year. Money has been swept back in many years because KDOT had it in reserves. • $487 million is scheduled to be transferred in 2014. Keep the extra $162 million in General Fund until it’s proven that it’s necessary. Full efficiency audit of KDOT/KTA and needs/wants analysis of T-Works should be conducted first.

12. Cash Options to ‘Buy Time’ • Require school districts to use carryover cash as authorized by HB 2261 by considering it ‘local effort’. Total authorized is $114 million. • Carryover cash balances only increase when more money is collected than spent.. • Districts began FY 2013 with $889 million in operating carryover cash. That’s a $431 million INCREASE since 2005.

13. Better Service, Better Price • Taxpayer-focused review of everything done by state government. • Eliminate anything that’s no longer effective or necessary. Agencies recommendations based on how they measure effectiveness. • Find ways to provide everything else at a better price.

14. Priority-Based Budgeting • Agencies prioritize every program / service based on effectiveness. Bottom-up cost reductions avoid harmful across-the-board cuts. • Assign direct costs to programs and everything else to Overhead. • Least-effective programs considered for elimination or reduction. All others reviewed for efficiency opportunities.

15. Privatization • Every agency must identify functions and programs than cannot be privatized. • Create a Privatization Commission of experts in various fields to work with agencies on developing RFPs that protect service quality. • Cities, counties, states and universities across the nation are using privatization to save money, enhance services and even fund capital projects.

16. General Efficiency Review • Create a State Efficiency Commission comprised of private sector experts in logistics, communications, purchasing, finance, IT, etc. to work with agency staff (‘agency’ include universities). • Review discretionary spending; have agencies explain how services would be impacted if some discretionary spending is reduced. (travel, memberships, consulting, advertising, etc.)

17. Reduce Targeted Subsidies • Corporate welfare (crony capitalism) is rarely reviewed because much of it is tax expenditures instead of a budget line item. • Company / industry specific subsidies aren’t effective. They shift costs to other taxpayers, a higher tax burden has negative economic impact and subsidies create competitive disadvantage for those not receiving them. • Tax reform is a universal incentive.

18. Lower Cost is not Lower Quality • Domestic migration is a good measure of citizens’ acceptance of service quality. • The ten highest-burden states lost 4.6% population due to DM between 1998 and 2012; the nine lowest-burden states (excluding Louisiana) gained 4.8%. Kansas lost 2.9% • If even there are some services that might be perceived to be of less quality, citizens are still deciding that low-tax states offer them the better ‘deal’.

19. Spending Doesn’t Drive Achievement States among the Top Twenty composite scores for 4th Grade and 8th Grade Reading and Math using a multivariate analysis (2011 NAEP) Source: Census Bureau; National Assessment of Educational Progress. Current spending excludes capital and debt; 2010 is most recent.

20. Conclusion • Tax reform is necessary to avoid going over our own fiscal cliff. It’s about economic growth and job creation. • States that spend less, tax less…and grow more. • Service reduction isn’t a trade-off for tax reform. • Better Service, Better Price is the way to implement tax reform so everyone benefits.

21. Contact Info • KansasOpenGov.org • KansasPolicy.org • (316) 634-0218 Wichita office • (913) 213-5038 Overland Park office • (316) 993-4667 mobile • Dave.Trabert@KansasPolicy.org