Friday, June 30, 2017

Kansas Turnaround

Kansans, we are done being kicked around. For five years we endured the eyes of the nation upon us, judging Gov. Brownbacks tax experiment. We became famous: the poster state for bad tax policy. The takeaway message from those watching was “Don’t do what Kansas did.”

But our narrative has just changed. Earlier this month, a bipartisan supermajority of Kansas legislators overrode a governor’s veto, effectively ending the experiment. Now the headlines trend toward a more positive, akin to “Kansas shows the way out” theme, or “Kansas provides a lesson to the country.”

Indeed, Kansas does show the way out. The experiment ended because a wide swath of Kansans become thoroughly engaged and said, “Enough.”

Kansans wanted their government to work, and wanted public education adequately funded. A practical approach to state finances and a sense of fairness about who should pay taxes triumphed over a discredited “trickle down” tax cut ideology. Gov. Brownback never repented of the financial mistake that defines his governorship, but finally most Kansans could see that his “sun is shining in Kansas” mantra was false.

Certainly, kudos should go to the courageous legislators and legislative leaders who voted to override. Ultimately, though, the real deciders on this issue were Kansans themselves. An override vote that raised taxes and repudiated a governor’s policy agenda could not have happened without strong consent from the populace.

Most citizens prefer not to spend their time thinking about budget and tax policy issues. But by the summer of 2016, an overwhelming number of Kansans had tuned in to those issues. They did not like what they saw and definitively expressed themselves in the August primary and November general elections.

The 2017 legislative session began with one-third of the seats held by new lawmakers. Polling done mid-session showed that two-thirds of Kansas voters disapproved of the Brownback tax plan. That disapproval tracked across all political ideologies. An even higher percentage of voters expressed concern that the state was not investing enough in education. With those lopsided polling numbers, the die was cast for the override. Kansans had decided.

Kansas will be climbing out of the Brownback experiment for years. The override vote did not fix all problems, but at least everyone can take a breath. Our political energy can now focus on the future rather than on crisis management. Our red state status is likely still intact, but the roots of a practical and fair-minded Kansas have started to show through again.

Finally, a word to the rest of the nation: We Kansans are “mopping up our mess,” as Senate Majority Leader Denning put it. We’re turning around. Maybe many of you in other states thought we went nuts with our experiment, but keep any smug feelings in check. The whole nation could so easily go down the same rat hole. The Trump tax plan looms. It’s the Kansas experiment on steroids. Pay attention now, or we will all be mopping up something much bigger.

—This entry was originally published last week in a variety of Kansas newspapers.

Friday, May 26, 2017

A Yes Vote on the Trump Tax Plan Betrays Kansas

An open letter to the Kansas congressional delegation:

Dear Representatives Marshall, Jenkins, Yoder, and Estes, and Senators Roberts and Moran,

A moment of truth for each of you is at hand. President Trump has proposed a tax plan that looks and sounds remarkably like the Brownback experiment now playing out in Kansas. Trump will be asking for your vote — but please consider the experience of your home state before you cast it.

Just like the Brownback tax cuts, the Trump plan makes dramatic changes to tax policy by consolidating income tax rates and reworking deductions. But most notably, the Trump plan offers an enormous tax break to individuals who receive “business pass through income.” In Kansas this feature has become known derogatorily as the LLC loophole, allowing business income to be sheltered from income tax while people who earn a paycheck must pay tax.

Given that the same economists who advised Brownback now advise Trump, it’s unsurprising that the Trump administration uses similar arguments to sell its plan: the tax cuts will grow the economy and create millions of jobs; the tax cuts will pay for themselves; everyone will benefit. Brownback said all that, too.

But after five years of the Brownback experiment in Kansas, we know the real result. Kansas has an anemic economy and one of the lowest rates of job growth in the nation. A dramatic drop in revenue broke the state budget, wiped out reserves, significantly boosted state debt, and put public education at risk. And that part about everyone benefitting—well, it turns out that the bulk of the tax cut benefits went to the wealthiest Kansans while the tax bill to low-income Kansans actually went up.

The idea that tax cuts will “pay for themselves” or that tax cuts for the wealthy will “trickle down” to the middle class should be added to the list of discredited ideas that sound good but don’t work. The sell job at the beginning was oh-so-seductive, but Kansans now have the raw experience to grasp that the experiment carried out on us was a complete failure.

Do you understand how hard Kansas legislators must labor now to fix the financial disaster? Are you catching on that general fund revenue has fallen $1 billion below expenses? Can you see how all political energy goes into crisis management rather than building our future? Is that what you want for the entire country?

Based on your public statements so far, it’s hard to feel confident that any of you will acknowledge the tax policy failure in Kansas and fight off the Trump plan. If you support it, you betray all who have endured the troubles resulting from the Brownback plan, and the Kansas legislators who have been struggling in overtime this legislative session to reverse course. And a yes vote would be a willful betrayal, because after everything that has happened in Kansas, you will never be able to say “I didn’t know.”

Duane Goossen

—This entry was originally published last week in a variety of Kansas newspapers.

Tuesday, May 9, 2017

The Gaping Kansas Budget Gap

As the Kansas Legislature begins a “wrap-up” session, how big is the budget gap that must be closed in order to adequately fund schools and repair the state’s dismal financial situation?

Recent revisions to the general fund revenue forecast predict tax collections to be about $50 million a year higher than previously expected. That’s helpful, but Kansas still faces a huge structural budget imbalance without any reserves to draw on.

Following the release of the revenue estimate, media reports pegged the budget gap at $900 million over two years ($450 million annually). However, that calculation did not add anything to cover new spending for school finance, and assumes that $300 million will still be taken each year from the highway fund.

Look closely at each fiscal year:

FY 2017 (July 1, 2016 to June 30, 2017). Apply the new revenue forecast to the almost completed FY 2017. Recurring revenue** calculates to roughly $5.7 billion. But the budget for FY 2017 that lawmakers approved spends about $6.3 billion, $600 million above recurring revenue. To close that gap, lawmakers diverted $300 million from the highway fund to the general fund. And they authorized loans to borrow another $300 million, with a portion of the borrowed money to be repaid over the next 6 years, and a portion over 20 years. Also, $80 million of unpaid FY 2016 school bills that were shifted forward to be paid in FY 2017, will be shifted forward again. None of the FY 2017 “gap fillers” actually fix the state’s financial problems. In fact, they make financial problems even worse in future fiscal years.

FY 2018 (July 1, 2017 to June 30, 2018). Now consider FY 2018, the key fiscal year for which lawmakers must create a budget. Using the revised revenue estimate, recurring revenue again stands close to $5.7 billion. Lawmakers have not yet finalized spending for FY 2018, but both the House and Senate are headed toward a budget that spends more than $6.4 billion once required payments to KPERS are factored in. However, that $6.4 billion figure does not yet address the increased spending needed to fix school finance. The leading school finance bill under discussion adds $150 million to expenses each year for 5 years, eventually appropriating $750 million more for schools annually. Adding the first $150 million installment for school finance puts likely FY 2018 expenses almost $900 million above revenue.

FY 2019 (July 1, 2018 to June 30, 2019). In FY 2019 “recurring revenue” calculates a bit higher, between $5.7 and $5.8 billion, but expenses will be higher too. Add the second-year $150 million school finance installment, and the FY 2019 structural gap goes over $900 million.

To structurally balance the budget and meet education obligations, Kansas needs a revenue reform package that produces at least $900 million annually. Without a realistic solution, Kansas will continue to drain its highway fund, borrow, become poorer, and put the public education system at risk.

The 2012 income tax cuts are the root cause of these crippling financial problems in Kansas. Rolling back the Brownback tax plan remains the simplest and best solution.

** Recurring revenue is essentially the net income that can be counted on each year to pay for general fund expenses. Here’s a simple calculation of recurring revenue for FY 2017: Kansas expects tax revenue of $5.746 billion. From that, subtract $180 million for the state’s share of school construction bonds. (Though this cost should be shown as an “expense,” it is instead counted as a “transfer” or “reduction to revenue.”) Then add in interest income of $64 million, and agency earnings of $77 million. That very roughly brings FY 2017 recurring revenue to $5.7 billion.

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

Tuesday, April 18, 2017

Free Kansas

Kansas is thrashing in Governor Brownback’s grip. Tax reform to restore desperately needed financial stability? Vetoed. Medicaid expansion? Vetoed. A fair and adequate school finance formula? That bill has not yet arrived at the governor’s desk, but the prospect of a signature doesn’t look good.

The governor’s vetoes strike right at the heart of practical, fair-minded, fiscally conservative, give-a-hand-to-your-neighbors Kansas.

Deep down, Kansans know the state must bring in enough revenue to pay for necessary services. It’s basic fiscal responsibility. But, as recent polling shows, Kansans have figured out it’s not happening in the state budget, and a large majority want that changed. Education, highways, and Kansas’ future depend on sound finances. The vetoed tax reform bill that would have ended the Brownback “experiment” was passed with strong bipartisan support (40 Republicans and 36 Democrats in the House, 14 Republicans and 8 Democrats in the Senate).

Medicaid expansion offers health coverage to tens of thousands of uninsured Kansans, and is firmly pro-business by helping hospitals stay in operation. Kansans want to help their neighbors in this way. 82 percent favor expansion! Just like the tax reform bill, large bipartisan majorities in the House (41 Republicans, 40 Democrats) and Senate (16 Republicans and 9 Democrats) sent the Medicaid expansion bill to the governor.

The state is under court order to fix school finance by June 30. Schools stand as the backbone of many Kansas communities. Again, polling shows a large majority of Kansans in support of public education, and very wary of putting schools at risk with inadequate resources.

Brownback held Kansas back with his vetoes, but not singlehandedly. Legislators tried to achieve a two-thirds majority to override, but each time missed by just a few votes. The difference between override success and failure? Legislative leaders. President Wagle, Majority Leader Denning, and Speaker Ryckman voted with Brownback, and they are still trying to negotiate with him on these issues despite the fact that super majorities in their respective legislative chambers, and most Kansans, are not with them.

Negotiating with Brownback on tax reform can only lead to a very weak outcome, one that still leaves Kansas broke, borrowing, postponing bill payment, and diverting highway dollars. The governor’s only answer on Medicaid expansion appears to be “no.” On school finance, lawmakers are heading toward an updated version of the school finance formula that Brownback scuttled in favor of unconstitutional and inadequate block grants.

When legislators return from break on May 1, Kansas needs meaningful action. Legislative leaders have to quit Brownback, and move the state forward. Bypassing the governor may be hard for them, and out of the norm for Kansas politics, but that’s what the situation requires, and it’s what Kansans want.

Please, leaders and legislators, don’t make Kansas wallow in financial stress for another year. Don’t cut out the Kansans who need health care. Don’t risk having schools closed in August. Unclasp us from Brownback’s grip. He’s not the one who will be standing for re-election. He’s not the future. Override. Free Kansas.

—This entry was originally published last week in a variety of Kansas newspapers.

Friday, March 17, 2017

Name Your Budget Cuts

Kansas budget cutters: the time has come to get real and very specific. Which expenses can be cut to balance the state budget? What’s your plan? Put out the details so that Kansans can judge the best course of action.

Despite multiple rounds of budget cuts over the last years, some legislators and groups like the Kansas Chamber of Commerce and Americans for Prosperity have continued to make vague, abstract pronouncements that Kansas has a spending problem. They suggest that financial trouble in Kansas can be solved by getting rid of “inefficiencies.”

That kind of talk nurtures a popular stereotype of government, but does it at all ring true in Kansas anymore? If true, those saying such things should have no trouble naming the spending that needs to be eliminated. Surely, with the financial health of Kansas on the line, would-be budget cutters can muster specificity.

In the wake of a new court ruling, what part of school funding can be cut? Saying “put students first” is not an adequate answer though.

How about chopping Medicaid? Doctors, hospitals, and nursing homes providing services had their Medicaid reimbursement rates cut 4 percent this year. Can that cut be made deeper?

Vast amounts of money have been lifted from the highway fund, causing many road projects to be cancelled. Should Kansas spend even less on highway maintenance and bridge repair?

State employees have not had a raise in 9 years. How about making it 10? Or maybe cutting their health benefits can save money.

Without specifics, claims of an inefficient, overspending state government come up empty and lead nowhere.

When explaining his recent veto of a revenue-raising bill, Gov. Brownback chided lawmakers for not considering more expense cuts, but his own budget does not show the way. His main proposal to reduce spending shorts the required payments into the already precarious public employee retirement fund. That’s like a homeowner skipping mortgage payments. It doesn’t actually eliminate the expense, just piles it onto the obligations in future years.

Kansas faces a festering budget gap between income and expense that now exceeds a billion dollars. Only two approaches can effectively solve the problem: cut expenses—in a real way—or raise revenue. Lawmakers have not done enough of either to cure the structural imbalance in the budget.

Instead, they have resorted to short-term patches that kill Kansas financially—blowing through the reserves, borrowing, putting off bill payments, raiding the highway fund, trying to sell assets. With each of these maneuvers, Kansas has become poorer, but without fixing the problem. These misguided efforts have to stop.

If there was ever a time for serious budget cutters to shine, this is it. Put your proposals out on the table and explain them. But if you are only able to talk in generalities, don’t waste everyone’s time. Either offer credible ways to reduce expenses, or let the Legislature proceed to rollback the 2012 income tax cuts.

—This entry was originally published last week in a variety of Kansas newspapers.

Friday, March 10, 2017

Open Letter to Kansas Lawmakers: Evacuate from Fiscal Hell

Last week’s Supreme Court ruling requiring increased funding for Kansas schools did not surprise many people, but it still complicated an already challenging legislative session.

So, now what?

Here are three observations from a budgetary perspective:
  1. The goal post moved…a lot. Lawmakers must adjust accordingly. House Bill 2178 was a good first attempt at fixing our broken tax code, making needed structural reforms to stop future revenue hemorrhaging. But it only generated $460 million annually — far short of closing the $900 million structural shortfall created by Governor Brownback’s tax policy. Many still supported it (myself included) because a school finance ruling was likely to offer a later opportunity to finish the job. Now that the school finance ruling is upon us, lawmakers must restore $500-$800 million to schools in addition to filling the $900 million structural shortfall. House Bill 2178 generates far too little revenue to still be considered a responsible solution.
  2. Comprehensive tax reform should still come before any budget action. Many reports continue to characterize the gap as $350 million in 2017 and then $580 million in 2018. That’s only accurate if lawmakers raise $350 million in recurring revenue this year or make another $350 million in cuts. There hasn’t been much appetite for either of those options. It seems more likely the Legislature will borrow its way out of 2017 instead, as proposed in House Bill 2052 (the House rescission bill). If that happens, Kansas will face a $932 million gap in 2018. Just look at the basic numbers: the 2018 revenue estimate is $5.536 billion. Meanwhile, delivering the current level of services in 2018 is projected to cost $6.468 billion. Bear in mind that figure does not account for any payback for a Fiscal Year 2017 loan. Nor does it include any additional investment necessary to comply with the court’s order. There is simply no way to proceed without first stabilizing the revenue stream.
  3. Ten hundred million one way, one billion the other. Absent hundreds of millions more in budget cuts, Kansas faces a minimum structural gap of $1.4 billion. Billion. With a “B.” A tax reform package that fails to close this minimum gap guarantees yet another devastating shortfall next year – even if a school finance formula is phased in over time. Is that really how we want to spend 2018? This is the moment to end the crisis in its entirety.
Governor Brownback’s tax experiment dumped Kansas into a fiscal hell. Now even he reportedly seeks an emergency evacuation plan. Except – assuming it’s true – the Governor’s plan would only save himself. Kansas is on its own.

If even Governor Brownback can’t summon the courage to stay and fight for his failed tax experiment, why should any lawmaker defend it – or preserve any part of it – at the expense of Kansas schools and communities?

These are jaw-dropping figures, leaving no good options. Legislators deserve our thanks for not jumping ship and for demonstrating courage to put Kansas back on a practical path forward. Please keep going. It won’t be easy, but please do not stop short of ending this experiment once and for all.

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

Thursday, February 9, 2017

Repeal the Loophole, and More

The LLC loophole has come to epitomize budget-busting tax policy in Kansas. It appears that a majority in the new Kansas Legislature know the loophole must be repealed, and fully intend to end it. But if viewing the situation with clear-eyed honesty, those legislators also know that loophole repeal corrects only a fraction of the problem. To fix Kansas financially, lawmakers must produce a more comprehensive solution.

The loophole, put in place in 2012 as part of the Brownback tax experiment, set up a highly unfair tax situation. Individual Kansans who receive income through a limited liability corporation (LLC), self-employment, a farm, or rental property pay no Kansas income tax. But people who receive a pay check, do owe tax. An owner pays no tax on personal income taken from a business, yet employees of the business pay taxes.

Exempting such a large swath of income from tax has obviously lowered receipts and contributed to financial woes in Kansas, but with little economic payoff. The promise of explosive job growth failed to pan out, maybe because creating a job was never required as a condition of receiving the tax cut. Since the loophole opened, Kansas job creation has been anemic, running far behind our region and the U.S. as a whole.

The loophole has to go. No other state does tax policy this way.

While most Kansans have figured this out, they may not realize that just killing the loophole still leaves Kansas in deep financial trouble. Thanks to the 2012 tax changes, Kansas does not have nearly enough income to pay bills. The loophole caused about one-third of the revenue loss. Income tax rate reductions, which especially benefit the wealthiest Kansans, caused the rest.

The current dire Kansas financial situation will not cure itself; nor will one-time tricks and maneuvers work. Lawmakers need a comprehensive solution that raises enough recurring revenue to meet expenses. “Comprehensive” does not necessarily mean a complete return to pre-2012 tax law, but lawmakers at least need to consider moving the upper income tax rate back where it once was, in addition to closing the loophole. If money continues to be siphoned from the highway fund, a higher gas tax could allow a reasonable level of road maintenance.

The governor’s proposals are of little help: borrow, sell assets, renege on retirement funding, and grab even more from highways. Legislators have to produce the real solution on their own. Strategically, legislators may even need to vote against a stand-alone loophole repeal in order to force a vote on a broader revenue package. A piecemeal approach in which lawmakers cast individual votes on each potential revenue change will likely doom a comprehensive solution.

Irresponsible decisions made five years ago have left a huge mess in Kansas today. Our situation was a lot easier to get into than to unwind. Clean-up requires realistic assessment, courageous votes, and comprehensive tax reform. Anything less leaves Kansas in the same downward spiral.

—This entry was originally published last week in a variety of Kansas newspapers.

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