Saturday, January 14, 2017

Happy New Year Legislators, Now Fix the Budget

By Duane Goossen

For Kansas legislators, the new year may not feel all that happy. Veterans and first-termers alike have to be wondering why they ran for the job. In the upcoming legislative session, they face a daunting task, brimming with political risk.

Brownback’s “Kansas experiment” has brought the state budget to crisis. Kansas lacks the income to pay its bills, and not by a little. By hundreds and hundreds of millions. The politically thankless task for lawmakers: either restore revenue to meet obligations, or chop up education, highways, human services, and public safety. Doing nothing will result in damaging service cuts by default.

In the current, already half-completed fiscal year, the general fund has come up $350 million short, even after huge one-time transfers from the highway fund and emergency budget cuts to Medicaid providers and higher education. Most lawmakers will feel obligated to address that immediate pressing problem before grappling with the much larger structural gap between income and expense in next year’s budget.

But they should not proceed in that order. Addressing the long-term structural problem in the Kansas budget must have the highest priority! That may seem counter-intuitive, but it’s a bit like the safety instruction you hear from an airline attendant, “If the oxygen masks come down and you are traveling with a child, put your own mask on first; then attend to the child.” Stabilize the budget structure first, and then deal with the current fiscal year.

Only financially awful alternatives exist to cure the $350 million shortfall. Lawmakers cannot logistically raise new revenue fast enough. So that leaves either sudden budget cuts concentrated at year’s end, or some kind of one-time patch. With the bank account empty and the highway fund tapped out, the “easy” one-time patches have already been used up, but insiders talk of selling something (tobacco settlement revenue, the turnpike), or paying bills late, or grabbing the unclaimed property of Kansas citizens, or somehow borrowing the money.

One-time patches do not solve the real problem. Without a long-term solution in place, selling assets or borrowing become just another hopeless component in the downward spiral of Kansas finances.

But if lawmakers can muster the political will to put a long-term plan in place first, Kansas has hope for financial stability. Then a $350 million patch solution in the current year becomes a “bridge” to a more hopeful future, rather than a step into deeper crisis.

Kansas simply must raise revenue to structurally balance the budget. Closing the LLC loophole alone will not fix the problem. Hopefully Kansans will give their legislators political breathing room to pass a broad revenue reform plan correcting the irresponsible decisions of the past. Otherwise, we’ll face damaging cuts to education and key services.

Lawmakers, make it a happy new year for Kansas. End the ill-fated experiment and structurally fix the budget. Do it early in the legislative session. Do it quickly.


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

Thursday, January 5, 2017

The Gap Lawmakers Must Close


The Kansas budget has a huge structural imbalance, a daunting gap between income and expense. For the Kansas general fund to remain solvent, lawmakers must close the gap.

The general fund became structurally unbalanced immediately after the 2012 income tax cuts were implemented, but the situation has become especially dire now with reserves used up and the highway fund tapped out.

Look closely at revenue. The latest Consensus Revenue Estimate (CRE) forecasts total general fund revenue in FY 2017 at just under $6.0 billion, but that total already includes previously authorized one-time transfers of about $400 million from many different funds (especially the highway fund). That means real income, actual money coming in during FY 2017 to pay bills, is just under $5.6 billion. And the CRE forecast for FY 2018: Just under $5.6 billion. And for FY 2019: Just under $5.6 billion. Before the tax cuts the general fund took in more than $6.3 billion annually, but by FY 2017 income has dropped under $5.6 billion without any prospect for improvement.

Now consider expenses. Even a constrained set of expenses for FY 2017 totals over $6.3 billion. Block-granted school funding, and emergency budget cuts to Medicaid providers and higher education have already been baked into that number. And those expenses will certainly grow in FY 2018 and beyond. Medicaid costs always rise. Required contributions to the retirement system (KPERS) increase each year. Enormous pressures across state government—no raises for state employees in 9 years, understaffed hospitals and prisons, underfunded schools—will push costs up.


The Legislative Research Department’s general fund profile outlines the grim structural problem. If the gap is closed only by cutting expenses, another $349 million must be chopped during the 6 months that remain of FY 2017, then an additional $582 million cut from services in FY 2018. Closing the gap by forcing expenses below $5.6 billion may be theoretically possible “on paper,” but highly dangerous and irresponsible, if actually done.

Alternatively, the governor and some lawmakers may promote some type of one-time solution—selling assets, borrowing, paying bills late—to address the remaining $349 million shortfall in FY 2017. (Remember, lawmakers have already approved about $400 million in one-time transfers for FY 2017.) But doing that does nothing to fix the structural problem. It only delays the inevitable reckoning and makes Kansas poorer in the process.

Kansas simply needs more ongoing revenue. The recent Rise Up coalition proposal provides a plan that restores financial solvency and tax fairness, without resorting to damaging program cuts or one-time solutions. The situation that Kansas faces requires a broad plan, more than just closing the LLC loophole. It’s either restore revenue to meet expenses, or whack away at education, highways, human service programs, and public safety.

The task ahead is critically important, though not politically easy. Many key services, which have already been cut or constrained, now hang in the balance. Hopefully when the next legislative session ends, Kansas will be moving toward financial stability, no longer consigned to downward descent.


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

Friday, December 2, 2016

Bipartisanship Required to Fix Kansas Financially


When the Kansas Legislature convenes in January, one-third of the seats will be filled by someone new. The election results show that many voters recognized the serious financial trouble in Kansas and now expect a change in direction.

But will they get it?

Lawmakers face a daunting task. To successfully alter the situation, they must take a big risk and do something that does not come naturally to politicians — gather a bipartisan coalition and reform the tax system to raise revenue.

State finances have so soured that the current budget sunk $350 million underwater even after record amounts were taken out of the highway fund and large spending cuts were unceremoniously applied to universities and Medicaid providers. This leaves Kansas schools and other key state services highly vulnerable to another round of debilitating cuts.

Kansas simply does not have enough revenue to pay even a constrained set of bills. The 2012 income tax cuts unbalanced the Kansas budget from the moment of implementation, but the situation has become especially dire today because lawmakers emptied reserves and exhausted other one-time budget maneuvers in earlier efforts to patch up the budget.

We have few options left. Without more revenue, lawmakers must make deep cuts-to-the-bone in state programs. For those legislators who voted in 2012 to deliberately starve the state’s revenue stream in order to downsize government, this is a happy climax. But that group lost heavily in the elections.

In the 2017 Legislature, moderate Republicans and Democrats now have enough numbers in each chamber to pass policy changes, if they work together. But forming coalitions becomes challenging whenever there’s hard medicine to swallow. Kansas lawmakers will face headwinds as the Trump administration and a Republican Congress attempt to pass the very kind of tax legislation on a national scale that Kansas seeks to undo here.

Then, even if tax policy changes pass the Legislature, the governor may not sign the bill. But despite the barriers, lawmakers must forge ahead because the stakes for Kansas are enormous. The financial sickness will not heal up on its own without corrective action.

One obvious step forward would close the LLC loophole which allows business income to go untaxed. The recent Kansas Speaks survey showed that 61 percent of Kansans support this action. Some lawmakers may be tempted to do only this and declare victory, but that alone will not fix the budget.

At a minimum, lawmakers must make revenue equal expenses, which requires ending the LLC loophole as well as enacting a package of other financial corrections. Reducing sales tax on food as part of this package — as some lawmakers propose to do — would require further upward adjustments to balance the cost.

Can lawmakers work across party lines to enact change? Will the governor sign a bill rescinding at least a portion of the 2012 tax cuts?

Unless the answer to both questions is “yes,” the financial suffering of Kansas will worsen, plunging our state into a further downward spiral.


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

Sunday, November 20, 2016

Budget Disaster Deepens


Kansas finances have come to a tragically grim place.

The official estimate of revenue for this fiscal year has just been revised sharply downward, and brand new forecasts for FY 2018 and FY 2019 show a meager, unworkable revenue stream. This new information means that lawmakers must immediately cut $340 million from the current budget, just to keep the general fund barely solvent.

The cause of this disaster traces straight back to the Brownback income tax cuts of 2012. After implementation, income tax receipts fell $700 million, from $2.9 billion in FY 2013 to $2.2 billion in FY 2014, and never recovered. Now, the new revenue estimate forecasts that same $2.2 to $2.3 billion level of income tax receipts all the way through FY 2019.

A huge swath of revenue that Kansas formerly depended on to pay bills has simply disappeared.

As a result, for the fourth year in a row, Kansas does not have nearly enough revenue to pay bills. This year, though, the situation is dire because lawmakers have already used up all of the reserves ($709 million at the beginning of FY 2014), and tapped out the highway fund, leaving little flexibility. Plus, the governor earlier applied deep emergency budget cuts to state agencies, higher education, and Medicaid providers.

Even so, another $340 million must somehow go before June 30. Public education and every other state service stand in serious danger.



This problem will not heal on its own. Without corrective action, things only get worse in FY 2018.

In this current fiscal year Kansas expenses are pegged at about $6.3 billion, and that’s a constrained set of expenses with emergency spending reductions already baked in.

In FY 2018 expenses will only grow: Estimators have already predicted that Medicaid costs will rise $30 million. A $100 million retirement system payment (an unpaid bill from FY 2016) comes due. A Supreme Court decision on education looms. And problems exist throughout state government from years of cutbacks and constraints.

So what’s the new forecast for total revenue in FY 2018? $5.5 billion. And in FY 2019? $5.5 billion.

Even if expenses do not go up a dime from current levels, a completely unrealistic assumption, Kansas revenue is $800 million off the mark in FY 2018 and again in FY 2019.

Kansans, we have to fix this! We have to stop the bleeding and reform our tax structure. We have to start now. The serious damage from the 2012 tax policy deepens every day.


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

Tuesday, October 25, 2016

Trump: Brownback Economics for America


Sam Brownback’s approval ratings as governor of Kansas are dismally low, yet polls show Donald Trump winning Kansas. How can both of those things be true? It does not make sense for Kansans to boo Brownback, but vote for Trump.

Over the last year, Brownback has consistently polled in the 20% approval range, the lowest of any governor in the nation. That almost unimaginable level of repudiation from Kansas citizens stems directly from his failed “Kansas experiment.” Brownback and his legislative allies cut income taxes in a big swoosh four years ago on the premise that the tax cuts would bring jobs and economic prosperity. Instead, the tax cuts broke the state budget and imperiled education, highways, and key services without delivering the promised economic jolt.

The experiment, which primarily benefitted the wealthiest Kansans, did not “trickle down” to middle or low-income Kansans. Rather, with the loss of credits like the food sales tax rebate, and increases in sales tax rates, lower-income taxpayers now pay more than before. Kansans noticed, and blame Brownback for the trouble.

But wait! Donald Trump has an almost identical economic plan: cut taxes sharply for wealthy Americans on the premise that this policy brings economic prosperity. He proposes creating the same kind of loophole for “business income” that Kansans have come to understand as deeply unfair. Past promoters of the Kansas experiment are now key members of Trump’s economic team.

Listen to Sam Brownback’s now famous words from four years ago:

“Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy. It will pave the way to the creation of tens of thousands of new jobs, bring tens of thousands of people to Kansas, and help make our state the best place in America to start and grow a small business.”

Now listen to Donald Trump from the first presidential debate:

“Under my plan, I'll be reducing taxes tremendously, from 35% to 15% for companies, small and big businesses. That's going to be a job creator like we haven't seen since Ronald Reagan. It's going to be a beautiful thing to watch.”

Same thing! Seductive words in the beginning, but the plan doesn’t work. Kansas provides powerful evidence.

Certainly this presidential election is more than a referendum on economic plans. Voters must weigh many important and complex issues. For Kansans, though, the economic plan should be a prime one. After all, it’s our issue. We are the ones in the front row seats, the on-the-ground witnesses to what happens when leaders go down an irresponsible path.

If you like what Brownback has done in Kansas, Trump may well be your guy.

However, to the majority of Kansans who are Brownback disapprovers: Giving Trump our six electoral votes, even by the slimmest of margins, would foist our troubles on the rest of the nation, and show that we have not yet fully learned the lessons from the Brownback years.


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

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.

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