Tuesday, September 12, 2017

Revenue Reset

Gov. Brownback’s tax experiment brought havoc to the Kansas budget, and put the state’s general fund in severe financial distress. But in June, a bipartisan supermajority of lawmakers rescinded those policies in a dramatic veto override and put Kansas back on a more stable financial path.

The chart below tells the basic story:

Income tax receipts took a steep $713 million fall in FY 2014, the first full fiscal year that the Brownback tax cuts were in effect. From a high of $2.9 billion in FY 2013, receipts dropped to $2.2 billion and then stayed down at the $2.2 to $2.3 billion level all the way through the just completed FY 2017. Total tax receipts follow the same basic pattern, although sales and cigarette tax rate increases that took effect at the beginning of FY 2016 made up for a small portion of the income tax loss.

The newly passed tax bill, eliminated the LLC loophole, stopped the March to Zero (a formula in state law for future tax cuts), and moved income tax rates higher, though still below the rates in place before 2012. The new law had only a minimal effect on FY 2017 receipts, but official estimates forecast that income tax receipts and total receipts will now recover enough in FY 2018 to reach revenue levels from five years ago.

But a key question: Are the forecasts of new revenue accurate?

We will not know for sure until May. Big changes to tax law can be quite difficult to forecast with precision. Brownback’s tax policy made LLC pass-through income, self-employment income, rental income, and farm income tax free. But under the new law, income earned from those sources during calendar year 2017 will again be subject to taxation. Normally people owing taxes on that income would make quarterly payments in April, June, September, and January or face a penalty. However, in this changeover year, individuals can choose to skip the quarterly payments without risking a penalty, and make one large payment by next April 15 when they file their 2017 tax return. We will simply have to wait until all those returns are received and counted to know the accuracy of the new forecast.

In the meantime, it’s important to watch each monthly revenue report to understand whether receipts track above or below expectations. But those monthly reports should also be viewed with caution, knowing that a large share of the new revenue may not appear until next spring.

Even with the expectation of new revenue, Kansas finances remain very fragile. Kansas has endured years of structurally unbalanced budgets. Reserves have been decimated, the highway fund compromised, and debt levels dramatically increased. And with school funding costs moving up, basic state expenses will continue to exceed revenue.

By undoing the Brownback tax policies, lawmakers took a huge first step toward recovery, but repairing all the damage will take time. Much more work remains ahead to nurse Kansas back to financial health.

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

Tuesday, August 15, 2017

Make the Medicaid Ticker Stop

Kansas topped $1 billion in forfeited federal funds early in 2016. But the clock kept ticking. Now losses have surpassed $2 billion, and the clock still ticks.

Our failure as a state to adopt expanded Medicaid eligibility continues to cost us dearly, financially, and morally.

Stop reading for a moment, and just watch the live ticker there from the Kansas Hospital Association. This is a running account of funding foregone. Watch as the dollar losses mount—at breakneck speed in just moments. More than $1,000 dollars a minute. More than $1 million a day.

Starting January 1, 2014 Kansas could have allowed 150,000 more Kansans to become eligible for Medicaid health services. The federal government would have paid the whole tab for the first 3 years and then 90 percent thereafter. By now more than $2 billion would have flowed directly into the Kansas economy.

Kansas only needed to say “yes.” Yet year after year Gov. Brownback and his legislative allies have made sure the answer was “no,” not for logical policy reasons, but because expansion was part of Obamacare.

At first many Kansans were also skeptical. But their attitude toward the Medicaid portion of Obamacare shifted as a majority of states—including red states like Arkansas, Kentucky, and Iowa—moved to expand. By 2017 surveys showed a strong majority of Kansans favoring expansion. That sentiment played out legislatively last spring when a bipartisan majority of Kansas lawmakers voted to accept the federal funds, but Brownback quickly put his veto pen to the measure, and an override attempt fell just a few votes short in the Kansas House.

As Brownback issued his veto, he likely thought Medicaid expansion was about to die anyway along with Obamacare. President Trump and a Republican Congress had put Obamacare repeal on the front burner nationally. Yet “Repeal and Replace” and the starker “Repeal and Replace Later” have failed time and again, in large part because of the blow that would be delivered to Medicaid.

Medicaid expansion has proved to be an effective (and popular) way to reduce the number of Americans without health insurance. The Congressional Budget Office estimated that as many as 32 million Americans would lose health insurance as a result of repeal and replace legislation. Republican governors of expansion states opposed repeal. Kansas’ own Sen. Moran played a key role in keeping the possibility of Medicaid expansion alive for Kansas, after many of his constituents let him know how they felt.

So now Medicaid expansion appears here to stay, and our years of refusal seem more financially inept than ever. Kansans who could have had health care have been left without or shunted to emergency rooms, a moral stain on the Brownback administration and on Kansas.

In June the Kansas Legislature took an important step toward fixing the Kansas budget by rescinding Brownback’s tax policies. Expanding Medicaid eligibility should be the next step toward freeing Kansas from the troubles of the Brownback years, and that vote should occur immediately when the Legislature reconvenes in January.

Stop the ticker, lawmakers.

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

Friday, July 28, 2017

The Tall Tale Being Told In Kansas

The recently overturned Kansas tax experiment was sold to Kansans with a tall tale: “Big income tax cuts bring economic prosperity without any pain.” Eventually most Kansans realized the story was false, and their legislators ended the experiment this year with a bipartisan veto override.

Then, very quickly, a new story began to circulate: “The tax experiment failed because Kansas spends too much.”

Legislators on the losing side of the override vote made speeches claiming Kansas had a spending problem, not a revenue problem. Sam Brownback denounced “excessive spending” even as he signed the newly passed state budget. Tax cut apologists at places like the American Legislative Exchange Council began arguing that tax cuts work, it’s just that in Kansas spending was not reduced enough to match revenue losses. And just days after the override vote, Kris Kobach entered the governor’s race, blasting the vote as an effort to “feed” state government spending.

It’s easy to discern that the too-much-spending rhetoric is the old tall tale morphed into a new form. 

Here’s the test: If the talk was credible, the talkers would be able to provide a coherent list of spending to be cut from the state budget. But they don’t. Brownback could have issued line-item vetoes to knock out the spending he considered excessive. But he didn’t.

If Kansas spends too much, what should be cut? Name it. Education? Highways? Health services?

Realistic spending cuts are produced by getting rid of inefficiencies, or finding less expensive alternatives to current practices, or convincing constituents that something does not need to be done anymore. That happens through the grind of the annual budget process, through vigorous and detailed debate. It can be hard, tedious work, far different from just declaring that spending is too high.

In the just completed legislative session, lawmakers created a reasonable budget. The process was open. They grappled with the recommendations from an efficiency study and seriously worked to address the school finance court case. The result they produced was not lavish. Many needs were left unmet. Even so, revenue had fallen so low as a result of the Brownback tax cuts that Kansas was almost $1 billion short of meeting expenses. Lawmakers had no choice but to end the tax experiment.

Expenses in the Kansas budget almost entirely go to education, human services, highways, and public safety. No easy cuts there. Citizens want and expect those services. Certainly lawmakers should always be on the lookout for ways to keep spending as low as possible, but future expenses are far more likely to go up than to go down as lawmakers work to get school funding back to an adequate level and undo the damage from raiding the highway fund.

Kansas has a good deal of work ahead to regain financial stability—but excessive spending isn’t one of the problems requiring a solution.

Those complaining of overspending in our state who cannot offer specific places that could be cut would lead the state nowhere. They tell a tall tale.

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

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, June 2, 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.

Total Pageviews