LEGISLATIVE TESTIMONY: H.B. 2091, January 30, 2011

Testimony on HB 2091
House Taxation Committee
January 31, 2011
Bernie Koch – Executive Director, KEPC

Good afternoon, Mr. Chairman and members of the committee. Thank you for the opportunity to appear before you today in opposition to House Bill 2091.

I’m Bernie Koch with the Kansas Economic Progress Council, a statewide not for profit organization of businesses, trade associations, and chambers of commerce. We support pro-growth policies for communities and the state.

Our organization supported the one-cent sales tax increase last year after we received a study that we’d paid for by Dr. John D. Wong, Interim Director of the Center for Urban Studies and the Kansas Public Finance Center at Wichita State University. Dr. Wong was also a member of the Kansas consensus revenue estimating committee. That study compared what happens when you cut spending $350 million versus raising the state sales tax by a penny.

The study results show that a $350 million reduction in state spending would result in the loss of approximately 5,177 jobs across the state.

A one-cent state retail sales tax increase would generate approximately $350 million in additional revenue, but would result in the loss of 3,231 jobs across the state. Both options were bad, but the sales tax increase was the least harmful to jobs and the economy.

The study gave three reasons why a sales tax increase has a lesser negative impact.

“First, a high percentage of government expenditures initially stay within the state’s economy, going either to employees (state residents) in the form of salaries or to local businesses for the purchase of goods and services.”

“Second, the revenue enhancement scenario spreads the negative effects throughout the state, both geographically and across all 2.8 million residents. The effect on any individual and on any business is minor. In contrast, the spending reduction scenario severely affects a small number of state residents and businesses-state employees and those private-sector businesses that serve state employees and state government directly. The likelihood of a business failing under this scenario is much greater than in the tax increase scenario.”

“Third, a portion of the sales tax increase will be exported to tourists and other visitors to the state. The full effect of the tax increase is not felt within Kansas.”

That study was one reason we supported the sales tax increase. Another was that a portion of it will be used to finance the next comprehensive transportation program.

State investment in infrastructure has a strong impact on the economy. One of the first economists to argue this was Dr. David Aschauer in a 1989 study that concluded much of the decline in U.S. productivity in the 1970s was the result of declining rates of public capital investment. His findings have since been confirmed by other studies. Dr. Alicia H. Munnell, in an article published in the Journal of Economic Perspectives, gives an excellent example of why public infrastructure investment helps the economy.

She says a well-constructed highway allows a truck driver to avoid circuitous back roads and to transport goods to market in less time. The reduction in required time means the truck driver is more productive, the producer doesn’t have to hire as many truck drivers or buy more trucks, and there’s less wear and tear on the trucks. Hence, public investment in a highway enables private companies to produce their products at lower total cost. The condition of the highway is just as important as its existence.

Dr. Munnell adds that similar stories can be told for mass transit, water and sewer systems, and other components of public capital. She concludes that public capital investment stimulates private investment and public capital has a positive, statistically significant effect on employment growth.

Finally, I want to tell you about an independent statewide poll that did not get a lot of publicity because it was released just after the election in November. Conducted by the national polling firm Survey USA for television station KWCH, 500 Kansans were asked, “Would you support or oppose repealing the one cent sales tax that went into effect in July?”

38% said support, 47% said oppose, while 14% were not sure.

However, the 38% who supported repeal were then asked, “If repealing the sales tax meant further cuts to education, social services and public safety, would you still want to see it repealed?”

The opposition then melted away, with 67% saying no, 29% yes, and 4% being undecided.

Remember, these were the people surveyed who originally said they would support repeal, but over 2/3rds of the 38% changed their answer to opposing repeal when it was tied to further cuts.

Finally, I know you have a very difficult job this year. I don’t envy you. You already have a $550 million hole in the state general fund. I can’t imagine how difficult it will be to try to find another $300 million plus in reductions.

I urge you to reject this proposal. Thank you for the opportunity to appear

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