Monday, October 17, 2016

Who Benefited for the Kansas Tax Cuts?

The hard evidence is in.

The bulk of benefits from the income tax cuts that broke the Kansas budget went to a small number of wealthy individuals, while Kansans at the low end of the income scale actually paid more.

The Kansas Department of Revenue publishes an annual report containing many tax collection statistics. Data on individual income tax receipts takes time to appear, but the 2015 annual report (page 22) now shows information for tax year 2013, the first year the tax cuts were in effect.

The annual report from a year earlier (page 22) provides tax year 2012 stats. Place the two sets of information side by side (chart below), and it becomes easy to see how the benefits were distributed.

Look first at the totals for All Kansas Residents. From 2012 to 2013 income tax revenue drops roughly $700 million.*

A $700 million tax break!

Did the lowest income Kansans receive any of that? No.

Taxes for those making $25,000 or less actually increased, from a $16 million credit in 2012 to a $12 million payment in 2013—a $28 million swing.

The next income levels up have a slight tax break, but hardly noticeable. The majority of the benefit—about $400 million—went to about 20,000 returns with an income level of $250,000 and up.

Note that Kansas Adjusted Gross Income (KAGI) drops about $6 billion from 2012 to 2013. Did the real income of Kansans actually go down that much? No.

Federal Adjusted Gross Income for those years does not show that drop (see IRS tax statistics) because it still includes “business income.” The first year that Kansas completely exempted “business income” from Kansas tax liability was 2013, which when excluded, causes KAGI to go down and yields up a tax break mostly for people in the highest income category.

Kansans with the lowest income paid more. Kansans with the highest income received an enormous tax break.

That is not speculation. That is not an estimate. That is precisely what happened, and continues to happen each year.

And remember that these numbers only reflect what occurred with the income tax. They do not show the effect of sales tax rate increases that gave Kansas the highest sales tax on food in the nation, or increased fees for services, all of which take a much larger percentage bite from the incomes of Kansans with the least wealth.

A small group of high-income individuals got a giant tax break.

Kansas got severe financial troubles, poorer services, a budget that does not work, and economic indicators that lag behind our neighbors and the nation.

Was it worth it?

* Note: Tax years correspond to calendar years. In terms of fiscal years, income tax revenue dropped $701 million in FY 2014 and then stayed down at that very low level in FY 2015 and FY 2016.

—This entry was originally posted on the Kansas Center for Economic Growth website.

Monday, October 3, 2016

October Update: The FY 2017 Budget Won’t Work

It’s even clearer now. The FY 2017 budget won’t work, which means mid fiscal year budget cuts are ahead. And those budget cuts must be taken from a set of expenditures already squeezed down and chopped up.

New information allows an update of the official version of the FY 2017 budget. We now know the actual beginning balance—$37 million—that carried over from FY 2016. We also now know the amount of FY 2016 unpaid bills—$87 million—forwarded for payment in FY 2017.

The carryover balance was above zero “on paper,” but only because Kansas did not pay all its bills in FY 2016. Had the bills been paid on time, the carryover balance would have been $50 million below zero. (That does not count the $96 million KPERS payment due for payment in FY 2016, but deferred until FY 2018. Timely payment of the KPERS bill would have taken the carryover balance even further below zero.)

The updated general fund profile (shown below) starts with the beginning balance of $37 million. The unpaid FY 2016 bills add onto FY 2017 expenditures. After pushing FY 2016’s unpaid bills forward, the gap between ongoing revenue and expenses grows to $430 million in FY 2017. This updated version of FY 2017 projects an ending balance of $5 million, but with two great big “IFs.”

The ending balance will be barely positive IF the sale of the bioscience authority brings in $48 million. That’s not likely.

And the ending balance will be barely positive IF revenue comes in as projected. However, three months into the fiscal year, general fund tax receipts are already $67 million below projections.

July tax revenue missed projections by $13 million, August missed by $10 million, and September missed by $44 million. The updated FY 2017 general fund profile shown above does not yet account for those misses. In early November, the FY 2017 revenue estimate will be revised—revised downward—and then the general fund will be “officially” underwater, triggering the necessity for more budget cuts.

Given actual experience in the first 3 months of FY 2017, the revised revenue estimate could potentially be $200 million (or more) lower than the current one.

Kansas does not receive nearly enough revenue to pay its bills, but that’s not a new phenomenon. The budget became structurally unbalanced four years ago, immediately after the implementation of unaffordable income tax cuts. Make no mistake. Kansas’ current troubled finances originate right there.

—This entry was originally posted on the Kansas Center for Economic Growth website.

Tuesday, September 20, 2016

School Funding Dreams

Recently, Gov. Brownback held a press conference to invite Kansans to email him ideas for a new school finance formula. That sounds nice. Can anything be wrong with asking people for input? Well, actually, quite a bit.

The big problem: A new school finance formula requires resources—money—and Kansas does not have any. The governor asks Kansans to think expansively, but offers no means to make those ideas real.

Tell someone to imagine their dream home. Encourage them to draw plans, and do it up just right. But if that home is financially out of reach, cheerleading has done little for them. The exercise is just something fleeting, a dream, a temporary escape from reality.

The governor’s own policies created the grim education finance situation that Kansas now faces. Income tax cuts and the LLC exemption caused a large block of general fund revenue to disappear. Before the tax cuts, Kansas had a workable school finance formula, but one which logically boosted funding for schools when enrollments and operational costs went up. With state finances spiraling downward, a formula requiring increased state aid could not stand. The governor and his legislative allies summarily scrapped it for block grants, first cutting classroom aid and then freezing that lowered funding level in place.

The block grants have not worked well. They immediately caused unequal funding between school districts, and further, they have failed to provide for the future as student counts rise and needs increase.

Beyond these problems though, the dirty little secret is that Kansas cannot even afford the block grants. In the fiscal year that just ended June 30, the Kansas general fund spent $500 million more than it took in, even with block grants in place. That happened despite the fact that $100 million in bills were deferred for payment in a future fiscal year. The general fund only stayed afloat by grabbing huge amounts from the highway fund, and raiding the balances of other funds, including those set aside for kids.

In our current fiscal year, the same thing. Higher education and Medicaid providers—doctors, hospitals, nursing homes—have already been hit hard with emergency budget cuts, but more reductions will have to be applied somewhere, just to keep the general fund solvent.

Yet, suddenly the governor wants citizens and schools to dream about a new education formula. For now he instructs you to not even talk about what a new formula might cost. That’s for later. Just concentrate on the components you want.

This approach is nothing more than a big diversionary tactic that takes the voters’ focus off the real issue until the November elections pass.

Participate if you wish. Email those ideas in, but don’t be deceived. Until the governor faces up to the severe budget problems his policies have caused, until lawmakers close the LLC exemption, until Kansas rights its financial ship, any hope for an improved school funding formula remains completely unrealistic. You—and the governor—are just dreaming.

—This post originally appeared in a variety of Kansas newspapers.

Monday, August 29, 2016

The FY 2017 Budget Won’t Work

The FY 2016 budget did not work, and it’s already clear that FY 2017 will not work either. Mid-fiscal year budget cuts are quite likely ahead.

It’s the same problem that has existed since unaffordable income tax cuts were implemented. Kansas does not have nearly enough revenue to pay even a constrained set of bills. We’re broke.

Look at the “official” or approved version of the FY 2017 budget (from FY 2017 Comparison Report, page 12). Note the large imbalance between recurring revenue and expenditures. And that’s after the governor cut expenditures from the total that lawmakers approved last May. Medicaid providers—doctors, hospitals, nursing homes—have had their payments chopped by 4 percent to save about $57 million, and higher education funding was hit for $31 million. With those cuts incorporated, the official version shows an ending balance of $96 million, a positive number at least, but far below the statutorily required 7.5 percent of expenditures. (7.5 percent of expenditures in this budget equals $470 million.)

But the official version will not hold! The imbalance between revenue and expense will grow, and the ending balance will go negative without more budget cuts or other remedial action.

First of all, the official version assumes a beginning balance of $40 million. That did not happen. Rather, the state had to stop paying bills at the end of FY 2016 in order to keep the general fund balance just above zero.

Second and most important, the estimate of recurring revenue in the official version comes from the April Consensus Revenue Estimate (CRE). We now know that the April CRE overestimated FY 2016 tax revenue by $106 million, which means the FY 2017 estimate will almost certainly be revised downward when the forecasting group meets in November. Revenue was already short by $15 million in the first month of FY 2017. If the FY 2017 revenue assumption is lowered by $106 million to match what happened in FY 2016, the general fund will immediately be insolvent, triggering more expenditure cuts.

Third, the official version counts on one-time income of $48 million from the privatization or sale of the Kansas Bioscience Authority (KBA). Quite likely that figure is overly optimistic.

On top of all that, the state pushed payment of $75 million of school finance bills from FY 2016 into FY 2017 in order to get out of FY 2016. That expenditure shift does not show up in the official version, but if it did, the expenditure total would be $75 million higher. How will that $75 million be dealt with? We don’t know, maybe through more cuts, or maybe $75 million in FY 2017 bills will be pushed to FY 2018. Remember, the state also deferred $96 million in KPERS payments to get out of FY 2016 and promised to pay those bills in FY 2018 with interest.

Kansas lives on the financial edge, unable to move confidently into the future. Income tax cuts caused this. When lawmakers convene in January, they must build a budget for FY 2018, but without changes in tax policy, it too is destined to fail.

—This post originally appeared on the Kansas Center for Economic Growth website.

Thursday, August 25, 2016

R.I.P. FY 2016 — Another Year of the Downward Spiral

Fiscal year 2016—another year in the downward spiral of Kansas finances after unaffordable tax cuts. Financially, Kansas lived day-to-day, and in the end only managed to cross over to the next fiscal year by not paying bills. And all that trouble earned Kansas another credit rating downgrade.

Let’s briefly review the extraordinary budget actions of FY 2016, actions allowed by state law during times when the budget is in crisis:
  • July 30, 2015—The governor uses allotment authority to order $38 million in budget cuts and $63 million more of one-time transfers.  This action comes less than one month into the fiscal year and right on the heels of the longest legislative session in Kansas history.
  • November 10, 2015—To keep the general fund solvent the governor uses allotment authority again, this time to make $124 million in expenditure cuts and one-time transfers.
  • March 10, 2016—The governor uses allotment authority to hit universities for $17 million in immediate cuts.
  • May 18, 2016—Once again the governor’s allotment authority is used, this time to cut the approaching FY 2017 budget by $97 million, mostly through reductions to universities and Medicaid providers.
  • May 27, 2016—The budget director announces that the 4th quarter payment to KPERS will be delayed until FY 2018, reducing expenses in FY 2016 by almost $100 million, but adding that expense plus 8 percent interest to what must be paid in FY 2018.
  • June 22, 2016—The budget director announces at a State Finance Council meeting that the state will need to delay the last school payment of the year in order to close FY 2016 above zero, and then recommends that Kansas borrow $900 million on July 1, so that the state will have cash to operate in the new fiscal year.
No wonder it seems that Kansas has been precariously on the edge. We were. We still are.

Spending in the FY 2016 budget was constrained from the start, repeatedly cut during the fiscal year, and lowered further by delaying the fourth quarter KPERS payment, but in the end, expenses were still $506 million above recurring revenue, and that’s recurring revenue which included a big sales tax increase.

To bridge the structural gap, $277 million was transferred from the highway fund and $99 million from a series of other funds, and the small beginning bank balance was depleted. (The highway fund is also being used to directly pay expenses for things like school transportation.) Without all of those transfers the general fund would have been deeply in the red, but even with them, the general fund did not balance. To finish, the state pushed FY 2016 school finance bills into FY 2017 and then paid them with borrowed money in order to keep FY 2016 in the black on paper.

The $506 million structural gap, the lack of any cash reserves, the extraordinary use of one-time transfers, the delay of bill payments, and no plan in place to fix any of it caused Standard and Poor’s to again downgrade Kansas’ credit rating—our financial report card.

Unaffordable income tax cuts produced all this!

Next up for trouble: FY 2017.

—This post originally appeared on the Kansas Center for Economic Growth website.

Which Way, Kansas?

Kansas has come to a “T” in the road and must decide whether to turn one way or the other. A more apt way to say it: Kansas has come to a “T” in the road, overshot the intersection, gone down in the ditch on the other side, and must struggle up out of the ditch and go one way or the other.

It’s a ditch of serious financial trouble. Kansas simply does not have enough revenue to pay bills. For more than 3 years running, expenses have outpaced tax revenue by hundreds of millions a year. How has Kansas survived financially? By blowing through every dollar held in reserve, borrowing, and moving money from kids’ programs and the highway fund. The state only escaped the last fiscal year by leaving approximately $175 million in bills unpaid, promising to make payment sometime in the future.

Kansas cannot do that anymore. All those use-up-the-savings, pay-later maneuvers made the state poorer and poorer, garnered yet another credit downgrade, and took us into the ditch. We are left with a stark directional choice: impose more spending cuts, or raise revenue. Deciding how to respond constitutes the most critical job lawmakers will have when they arrive at the 2017 legislative session in January.

Many current lawmakers acknowledge the financial ditch, but say it’s a spending problem. “Clearly we’re here because we haven’t cut expenses enough,” Senate President Wagle said in June.

Certainly there have been cuts—to road projects, universities, hospitals, classrooms—just not “enough.” Yet supporters of the cut-more direction often speak abstractly, rarely specifying what “more” means. In July Gov. Brownback signaled his willingness to make even deeper budget cuts, but would not name them, saying he wants the Legislature to lead the way.

In theory at least, cuts could go a lot deeper. Cut school funding in half! Withdraw all state support from universities! Put fewer highway patrol officers on the road! Dramatic, service-ending cuts can resolve the financial imbalance, and may be what some lawmakers have intended all along. Easy reductions were implemented long ago. Even a $3 million “efficiency study” commissioned by the Legislature yielded little to alter the current dynamic.

The other route open to Kansas adds revenue back. The 2012 income tax cuts—lowered rates and “business income” exemption—caused a huge swath of receipts to disappear. Income tax collections dropped $700 million the first year and cumulatively the revenue loss now exceeds $2 billion.

Lawmakers did raise sales and cigarette tax rates in 2015 to compensate, but the new revenue only dented the amount needed to make up the income tax revenue loss. So far, lawmakers have not been willing to revisit the income tax cuts that caused the state’s financial problems in the first place.

The business income exemption has elicited the most criticism. It’s unfair. People who receive paychecks, pay taxes. People who receive self-employment income, rental income, LLC income, or farm income, don’t pay. No other state sets up its tax system in such manner, so rescinding the exemption seems an obvious first step to financial health for Kansas, although that alone will not fix everything.

Which way? That’s the question at the heart of this year’s election cycle. A choice between deeper cuts to services or raising revenue has become unavoidable. Primary election voters expressed dissatisfaction with the current state of affairs by voting out many incumbent legislators. General election voters may well choose to fire some more. Election outcomes cannot remove the unpleasant choice ahead, but what happens in November will determine the path that Kansas takes.

—This post originally appeared in a variety of Kansas newspapers.

Wednesday, July 20, 2016

Income Tax Cuts Broke the Kansas Budget

Another year of revenue data just went into the statistics books. The 2016 fiscal-year-end revenue report offers more evidence of how dramatically the 2012 income tax cuts have affected the Kansas budget.`

Kansas does not receive nearly enough revenue to pay bills.

In FY 2014, general fund tax revenue fell $701 million, immediately destabilizing the budget. The revenue stream never recovered. Even after sales and cigarette tax rates were increased for FY 2016, tax revenue has not come close to reaching pre-tax cut levels.
Individual income tax receipts have been the key driver in the revenue loss, with FY 2016 collections $28 million below FY 2015, and $683 million less than in FY 2013. FY 2016 became the third year in a row in which a huge hunk of general fund tax receipts simply disappeared. Normally, income tax receipts would grow, but while other states were experiencing post-recession receipt growth, Kansas income tax revenue fell backward dramatically and stayed down. Had Kansas income tax receipts grown in a similar way to the rest of the nation, Kansas collections would have been more than a $1 billion higher in FY 2016.
Sales/use tax and cigarette tax receipts both rose in FY 2016, but as a result of rate hikes. Pushing the state sales tax rate to 6.5 % was projected to raise $176 million. In FY 2016, sales/use tax receipts were $174 million higher. Moving the per-pack cigarette tax from 79 cents to $1.29 was predicted to bring in $41 million, and actual collections grew $50 million.

Corporate income tax (tax on full corporations) fell backward by $63 million in FY 2016, but no one should be very surprised. Corporate income tax receipts are quite volatile, moving up and down, depending on economic conditions. Likewise, receipts from the severance tax on oil and gas are tied to price. With oil prices low, FY 2016 severance tax receipts ended up $71 million lower than the year before. States must plan and be prepared for variations in tax receipts from these sources. But Kansas has been left unprepared for even small variations in tax receipts because of the damage done by income tax cuts.

Certainly the reduced collections from corporate income tax and severance tax contributed to the dismal FY 2016 revenue results, but they pale in comparison to the income tax collection loss.

To deal with the severe budget problems created by the income tax cuts, lawmakers have blown through reserves, borrowed, raided the highway fund, taken money from children’s programs, cut services, and raised the sales tax rate. But they have not addressed the source of the problem—unaffordable income tax cuts. As a result, Kansas literally scrapes by financially, day by day, unable to invest in the future.

—This post originally appeared on the Kansas Center for Economic Growth website.

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