By Nick Carey
WICHITA, Kansas (Reuters) - Fiscal conservatives in Kansas have turned their state into a laboratory to test reforms similar to the "Ryan plan" for massive tax cuts at the national level -- and the result has been a Republican civil war.
Backers of recent state tax cuts argue they will create jobs and boost the economy to partially offset lost revenue, with budget cuts solving the remaining shortfall. The tax cuts go into effect in January, and the Kansas Legislative Research Department calculates the lost revenue will amount to the equivalent of 36 percent of the state budget within five years.
Republican Governor Sam Brownback has described the reforms as a "real live experiment" that proponents want to see implemented at the national level.
Critics say there are few specifics on spending cuts. The same criticism is leveled by opponents of U.S. House Budget Committee Chairman Paul Ryan's "Path to Prosperity," which President Barack Obama has called "thinly veiled social Darwinism," arguing its spending cuts are vague and will hurt everything from education to low-income families and highways.
The "Ryan plan" maintains that cutting taxes and broadening the tax base is "pro-growth reform" that will "promote innovation and sustained job creation in the private sector."
Moderate Republicans, who control the Kansas state Senate with Democratic help, argue that a tax-cut-fueled boom is a pipe dream and lost tax revenue will devastate schools, roads and basic services for the poor, as well as lead to the release of convicted felons.
"The tax cuts will do huge damage to Kansas over the next few years," said Republican state Senate Vice President John Vratil, who is retiring and refers to conservatives as "ultra right wingers." "It's pretty clear that unless something changes we will see dramatic cuts to public services like education."
Internecine warfare has led to a slew of challenges against moderate Kansas Republicans in the August 7 primary.
"Someone has to get the nation's fiscal house in order," said Mike O'Neal, Kansas House speaker. "The people who can get that done are conservatives."
Republican presidential candidate Mitt Romney, who is running neck and neck with President Barack Obama in opinion polls, supports the Ryan plan, which Democrats worry will destroy the social safety net.
Moderate Republicans worry Kansas is a harbinger of problems for the party nationally. They fear conservatives could push the party too far right if they hold the House, take the Senate and win the presidency this November.
"The question is, Can moderates reassert control of the party?" said University of Kansas politics professor Burdett Loomis. "Right now it appears the greater risk for the Republican Party is having its dreams come true in November."
BROWNBACK'S AGGRESSIVE AGENDA
Kansas has not voted for a Democratic presidential candidate since 1964. Registered Republicans vastly outnumber Democrats, but moderate Republican Kansans sometimes elect centrist Democrats such as former Governor Kathleen Sebelius.
The two parties in this largely rural state of 2.8 million have often functioned as three, with moderate Republicans forming an informal majority with Democrats.
Conservatives triumphed in 2010, winning the governorship and enough seats in the state House to outnumber moderate Republicans and Democrats. The state Senate was unaffected since it was elected in 2008 for a four-year term.
Long known as a social conservative, Brownback and his allies have focused more on fiscal issues, though the governor has signed into law several pieces of anti-abortion legislation.
"Brownback has been an extremely aggressive governor," said Edward Flentje, a Wichita State University politics professor. "No governor in recent times has taken on as many issues."
Those issues included voter ID legislation and turning over management of Medicaid in Kansas to three private companies. Relations quickly soured among Senate Republicans.
"We started using words like 'war' and 'mutiny' with our moderate leadership," said Ty Masterson, a conservative senator.
The tax cut bill brought things to a head, with conservatives arguing a new approach was needed because spending increases were unsustainable. The state budget grew 46 percent from fiscal year 2003 to 2012, while the population grew just 7 percent from 2000 to 2011.
The law, passed in May amid much acrimony, removed the top state income-tax bracket and lowered the remaining two, as well as making some businesses, including limited liability companies, tax exempt.
"Whatever you want to call it, it's the Ryan plan," said University of Kansas's Loomis. "This is based on pure faith in supply side economics."
According to a Kansas Legislative Research Department analysis, in fiscal year 2018 (beginning July 2017) the revenue loss would exceed $900 million and the cumulative hole from previous years in the projected $6.8 billion state budget would amount to nearly $2.5 billion. A June 14 Moody's Investors Service report said tax revenue losses would be "dramatic," adding that "inaction or the use of unsustainable budgetary measures to offset the loss could lead to a (rating) downgrade."
Moderate Republicans say dramatic revenue losses will hit public services hard, especially public education, which accounts for 62.4 percent of the current annual state budget.
"Unless jobs come flooding to Kansas, the first place to cut is education," said Republican Senate majority whip Jean Schodorf, who faces a conservative primary challenger. "We have to hope this (tax cut package) is a success, or a lot of people are going to get hurt. This is barebones, Libertarian government."
Derrick Sontag, state director of conservative group Americans for Prosperity, argues that because Kansas law prohibits deficits, incremental spending cuts will offset the shortfall, which conservatives say will be minimal.
"Tax reform will result in increased economic activity that will lead to increased tax revenue," Sontag said. "Kansas is close to being a model state for the free market, limited government approach."
KOCH'S HOME TURF
Even before the tax fight, conservatives planned to target moderates, whom they call "liberals," in the state Senate. All 40 seats are up for election in November.
The conservative challengers include several chief executives - including Gary Mason, CEO of a Wichita-based environmental services company, and David Harvey, head of a commercial real estate firm in Overland Park - arguing, much like Mitt Romney, that their business experience will benefit the state economy and create jobs.
Moderates, who refer to themselves as "traditional Republicans," acknowledge they face a tough fight.
Some also complain about the influence of conservative oil and gas billionaire brothers Charles and David Koch, whose Koch Industries is based in Wichita and employs more than 2,900 people in Kansas. Together, the company and Koch family members contributed $60,000 to Brownback's campaign in 2009 and 2010, campaign filings show.
"The influence of Koch Industries is felt daily in this state," said Republican Senate President Steve Morris, who faces a conservative primary challenger. "The Senate is the last bastion of traditional Republicanism here. We're fighting for the heart and soul of Kansas."
Morris and other moderate Republicans claim, for instance, that the powerful Kansas Chamber of Commerce - which has endorsed and is backing a number of conservative primary challengers - is a "puppet" of the Koch brothers. The chamber has rejected that claim outright.
Koch Industries spokeswoman Melissa Cohlmia said the Kochs are "convenient targets" for opponents of their free-market philosophy, and Kansas voters will decide their own path.
"With regard to Governor Brownback, we applaud his efforts to reduce public debt and spur job creation," she said by email.
Moderates like Morris fear conservatives generally could seriously damage the Republican Party.
"Conservatives here in Kansas have already over-reached," he said. "At the national level the party has to be careful it does not over-reach by cutting too many public services."
"People may wake up and punish the party."
(Editing by Claudia Parsons and Prudence Crowther)