By Nick Carey

WICHITA, Kansas, July 18 (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)

Copyright 2012 Thomson Reuters. Click for Restrictions.

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    FreedomWorks, the conservative nonprofit organization, contributed $2,236,514 to its super PAC, FreedomWorks for America. The group is run by former Rep. Dick Armey and was instrumental in organizing the original Tea Party protests in 2009. The super PAC has been active in Republican Senate primaries backing Richard Mourdock's successful campaign to beat Sen. Dick Lugar in Indiana. The group also also thrown its weight behind Ted Cruz in Texas and Don Stenberg in Nebraska. Stenberg lost his primary to state Sen. Deb Fischer and Cruz faces a run-off election against Texas Lt. Gov. David Dewhurst. The group is also spending money to defeat Sen. Orrin Hatch in Utah. FreedomWorks has been spending money to help elect Tea Party Senate candidates like Cruz and Mourdock in the general election.

  • National Association Of Letter Carriers (D)

    The National Association of Letter Carriers' political action committee, the Committee on Letter Carriers Political Education Fund, gave $2,225,919 to super PACs during the 2012 election cycle. The union gave $1,213,919 to the AFL-CIO super PAC, Workers' Voice, $512,000 to House Majority PAC and $500,000 to Majority PAC.

  • Jon Huntsman Sr. (R)

    Jon Huntsman Sr., the billionaire Utah industrialist, contributed $2.22 million to a super PAC supporting the presidential candidacy of his son, Jon Huntsman Jr. Huntsman Sr. has given away much of his fortune in recent years and is estimated to be worth slightly north of $1 billion. Huntsman's contributions to Our Destiny, the super PAC backing his son in the Republican primary contest, came under scrutiny based on the laws banning coordination between super PACs and campaigns.

  • Irwin Jacobs (D)

    Irwin Jacobs, a founder of Qualcomm, has contributed $2.2 million to super PACs. Jacobs is worth $1.15 billion and ranks 372nd on the Forbes list of the 400 richest Americans. Jacobs has given $2 million to Priorities USA Action (supporting Barack Obama) $100,000 to Majority PAC and $100,000 to American Bridge 21st Century.

  • National Association of Realtors (I)

    The National Association of Realtors, the primary trade association for realtors, has contributed $2,110,485 to its own super PAC in the 2012 election cycle. The group has long been a player in congressional elections and has already spent significant amounts to help Rep. Gary Miller (R-Calif.) hold his newly redistricted seat in the 2012 elections.

  • National Air Traffic Controllers Association (D)

    The National Air Traffic Controllers Association has given $2,106,597 to super PACs during the 2012 election cycle. The union represents 20,000 controllers, engineers and other professionals involved in air traffic control. The union gave $1.25 million to Priorities USA Action (supporting Barack Obama), $600,000 to Majority PAC, $156,597 to the AFL-CIO Workers' Voice and $100,000 to House Majority PAC.

  • Warren Stephens, Stephens Investment Holding & Stephens Inc. (R)

    Warren Stephens, the head of Stephens, Inc., has contributed $2.05 million to super PACs. Stephens is tied for the position of 130th richest American, according to Forbes. Stephens has given $1.5 million to American Crossroads, $500,000 to Restore Our Future (supporting Romney) and $50,000 to Congressional Leadership Fund. (Pictured: Stephens, right, with President George W. Bush.)

  • Laborers' International Union (D)

    The Laborers' International Union, which represents a half-million construction workers, has given $2.025 million to super PACs. The union gave $1.3 million to House Majority PAC, $650,000 to Majority PAC, $70,000 to Workers' Voice and $5,000 to The American Worker.

  • Richard Roberts (R)

    Richard Roberts, an adviser at Mutual Pharmacy, has given $2.1 million to super PACs in the 2012 election cycle. Roberts gave $1 million to Treasure Coast Jobs Coalition, $750,000 to Restore Our Future, the super PAC supporting Mitt Romney, $250,000 to American Crossroads and $10,000 to Patriot Prosperity PAC. (Pictured: Mitt Romney, the candidate supported by Roberts' contribution.)

  • The Morses, The Villages & Other Companies (R)

    H. Gary Morse, his wife, their children, the retirement community they operate, The Villages, and a number of subsidiary companies have combined to contribute $2,003,400 to super PACs in the 2012 election cycle. The Morses and their companies contributed $1,753,400 to Restore Our Future (supporting Mitt Romney), $200,000 to American Crossroads and $50,000 to Freedom PAC (supporting Connie Mack). H. Gary Morse is part of Romney's Florida finance team and has hosted fundraisers for the former Massachusetts governor. The family's super PAC giving has all gone to support Romney's bid. Through September, a series of subsidiary companies controlled by The Villages and H. Gary Morse contributed $1.25 million to Restore Our Future and American Crossroads.

  • Anne Cox Chambers (D)

    Anne Cox Chambers, the owner of the media company Cox Enterprises, has contributed $2 million to Priorities USA Action, the super PAC backing President Barack Obama. Chambers is also the daughter of failed 1920 Democratic presidential nominee James Cox. Chambers is the 26th richest American, according to the Forbes 400 list, with a net worth of $12 billion.