A Review of Significant State Tax Changes During 2009, a report by the Tax Foundation released yesterday, outlines budget choices states are making as the recession continues to cut into tax revenues. According to the report:

• Six states raised general sales tax rates.
• 17 states increased excise taxes on cigarettes.
• Five states increased rates of alcohol excise taxes.
• Nine states increased individual income tax rates.
• Five states reduced individual income tax rates.

Kansas has done none of the above, yet. Economic projections for Kansas indicate the state isn’t out of the woods yet.

KansasReporter has a story about the state’s economic prospects. The state is expected to lose approximately 6,450 jobs, according to a new economic forecast released on Friday by the Center for Economic Development and Business Research at Wichita State University.

The unemployment rate in Kansas rose more than 2 points to 6.4 percent during the last 12 months, ending October 2009, according to the report. Unemployment rose by 34,177 people.

There are signs of recovery on the horizon, the report noted. The number of people unemployed in Kansas declined by more than 23,000 from its peak in July to October.

Like Kansas, most state’s lawmakers boosted state spending to unsustainable levels while revenues were high. Now the boom has turned to bust leaving fiscal mayhem in state capitols. The report’s author, Joseph Henchman, says states have three choices to meet budgetary obligations.

Option one: Raise taxes. Officials claim that the budget cannot or should not be cut any further, and that the benefits of tax increases for the state budget outweigh the economic damage they can do in an economic downturn. Some tax increase proponents completely ignore the economic damage of tax increases. Henchman says most states taking this option targeted specific groups such as high-income earners, smokers, or out-of-state business transactions. Henchman says these revenue sources may provide short-term relief but can cause substantial harm to the state’s economy in the medium and long term.

Option Two: Roll back spending growth commitments made during previous years and take actions to spend no more than the state brings in. Arkansas and Indiana have taken this path. In Kansas 52 percent of the State General Fund goes to K-12 education and Schools for Fair Funding have announced their intention to seek court action to compel the Legislature to fully fund its promises in spite of economic realities.

Option Three: Use one-time funds and accounting gimmicks to paper over the current state budget shortfall. Henchman says this is the politically easiest option but doesn’t significantly curtailing spending.

“This irresponsible approach amounts to praying that the economy will soon recover and bring a surge of tax revenue. California has taken this path for several years in addition to raising already-high taxes, building up to a crisis in 2009 when the state issued IOUs, borrowed, seized funds from local governments, and enacted requirements that companies increase withholding to 110% of what workers owed-in essence an interest-free loan to the state.”

Kansas, like other states, is drawing down account balances, curtailing promised payments to non-state governments and using one-time stimulus aid to plug holes. But Henchman points out that stimulus funds come with strings that forbid cuts to some portions of state budgets and increase abuse of state Medicaid matching funds as a way to shift state general spending to the federal taxpayer.

Henchman’s recommendation:

When the recession ends, states need to have the right policies in place that will promote economic growth and maintain revenue stability. Relatively high taxes on high-income individuals, smokers, and out-of-state business transactions can make a state less attractive and create more volatility in an already uncertain economic climate.

So, what will Kansas do? That’s up to state legislators and how well they listen to the voters and taxpayers of Kansas.

To see the full report, go here.

For more information on Kansas’ tax and spend system go to the Tax Foundation’s State Tax Information page on Kansas here.