State tax-cut plans in 2013 tempered by caution

JEFFERSON CITY, Mo. -- Emboldened by big majorities and eager to lure businesses, Republican legislators and governors across the Midwest and South are planning to pursue hundreds of millions of dollars of tax cuts in the new year.

They might raise some taxes, also.

In many states, the exuberance to cut taxes during the 2013 legislative session suddenly has been chilled by worry about the potential consequences. Cautious state officials are now talking about the need for "thoughtfulness," warning that they'll "have to see how their numbers work out" and suggesting tax cuts in one area may need to be offset with increases in another.

The change in tune comes as Republicans struggle to balance a core belief in lower taxes and bold campaign promises against the practical need to pay their governments' bills. Political obstacles are less of a problem. A party that swept into power in many statehouses in the 2010 elections won even bigger majorities in 2012.

The case study for the new mood -- caution mixed with conflicting impulses -- is Kansas. The Republican-dominated state slashed income taxes in 2012, enough to save taxpayers a projected $4.5 billion over six years. Now it's facing a self-inflicted budget gap of roughly $300 million for the fiscal year that starts July 1 and wrestling with whether to cut services or extend a sales tax increase that is scheduled to expire. In neighboring Missouri, Republican supermajorities in the legislature are under intense pressure to pass their own tax cuts out of fear that businesses and employees will flow across the border.

"We don't live in a vacuum. It is ever more pressing that we are responsive, because other states are being much more aggressive than the state of Missouri is," said incoming Senate President Pro Tem Tom Dempsey. But he added: "This philosophy of, 'OK we'll cut the taxes and people will come' -- it takes a lot more thoughtfulness."

Tax code changes could be on the agenda in more states than usual in 2013 because more legislatures will be dominated by like-minded members. The number of states in which one party controls both chambers will be at its highest mark in decades, and half the state legislatures will have veto-proof majorities.

'Watershed year'

The Institute on Taxation and Economic Policy, a Washington-based research group that advocates for a tax code that charges more to the wealthy than the poor, predicts that 2013 will be "a watershed year for tax reform." It says 15 states could enact major tax changes, including Republican-led legislatures in Missouri, North Carolina and Oklahoma and Democratic-led states such as California and Oregon.

The American Legislative Exchange Council, a Washington-based group of legislators and corporations that advocates for free-market policies, also expects more than a dozen states to take up tax code changes in 2013.

"Many states are looking at Kansas to replicate parts of what Gov. [Sam] Brownback did," said Jonathan Williams, ALEC's director of tax and fiscal policy.

Kansas is cutting its individual income tax rates -- lowering the top rate to 4.9 percent from 6.45 percent -- effective in 2013, while also increasing the standard deduction for households and exempting the owners of 191,000 businesses from income taxes.

Brownback originally proposed to offset the income tax cuts by eliminating a number of deductions, including those for charitable contributions and home mortgages, and extending a temporary sales tax increase that is due to expire this July. But legislators decided to keep the deductions and Brownback signed the tax cuts into law anyway. He acknowledged in a December interview that Kansas now faces some short-term budget problems, but he insists the tax cuts are worth it.

"Our region has lagged the South and the Southwest on growth." Brownback said. " ... This is our discussion on how we catch up."

In December, Michigan Gov. Rick Snyder signed a law phasing out property taxes on industrial equipment, eventually saving businesses $600 million a year. But it will come at a cost. Local governments will be allowed to levy special taxes to recoup some of the lost revenue. And the state promises to reimburse most of what police, firefighters and other local services would lose.

Lawmakers in other states are expressing greater caution heading into 2013.

Newly elected Indiana Gov. Mike Pence campaigned on a new 10 percent cut to the state's income tax rates. But Pence's fellow Republicans appear apprehensive about the roughly $500 million price tag. House Speaker Brian Bosma has cautioned that any tax cut must be "sustainable." Budget leaders have hedged on whether Pence's proposal has a shot at passing.

"I don't know if we've decided that yet, I think we'll have to see how their numbers work out," said Republican House Ways and Means Chairman Tim Brown.

Republican Louisiana Gov. Bobby Jindal has proposed reworking the tax code. But he, too, wants it to be "revenue neutral," so if rates are cut in one place, an exemption could be eliminated in another.

North Carolina Gov.-elect Pat McCrory, a Republican, wants to reduce income tax rates to the level of surrounding states such as South Carolina and Virginia. But the proposals under discussion would offset that lost revenue with extra sales taxes.

"We're talking about a revenue-neutral stream to government," said North Carolina Sen. Bob Rucho, a Republican. "This, we believe, will put North Carolina on the cutting edge of economies in the country."

Oklahoma Republican Gov. Mary Fallin hopes to win passage of an income-tax cut that stalled in the Legislature last year, but said financial uncertainty in Washington may affect what she is able to propose.

In Missouri, the Senate leader said any income tax cut for individuals or businesses will likely need to be offset with other revenue increases or spending cuts. He cited the potential to collect taxes on Internet sales, sell a state-created workers' compensation firm or save money on prison costs through sentencing changes.

"We are going to be addressing the paid-for aspect of the income tax, such that we don't cut funding to public education nor do we cut higher education," Dempsey said.

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Associated Press writers Melinda Deslatte in Baton Rouge, La.; John Hanna in Topeka, Kan.; Tom LoBianco in Indianapolis; and Sean Murphy in Oklahoma City contributed to this report.