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.

Sunday, July 10, 2016

A Special Session That Should Not Have Been

A last-minute special legislative session? Kansas schools brought back from the edge after being on the brink of closing? How can such things possibly be happening?

This is Kansas, after all: practical, straight-talking, fiscally conservative, always-be-prepared Kansas. Surely lawmakers must comprehend that Kansans want stability, and want to be reasonably positioned to face future challenges.

If the governor and legislators do understand, they have not shown it with their financial management of the state. The Brownback fiscal experiment has left Kansas in a highly precarious financial position. A crisis over school funding and a special legislative session are just the latest examples of the chaotic environment born of unaffordable tax cuts.

The state’s long-running school finance formula logically called for more money to go to classrooms as costs and enrollments increased. However, with finances in a downward spiral, lawmakers opted to sack the school finance formula and cut funding. Then they froze that lowered aid level in place through a block grant.

Of course, without a formula, funding inequities between school districts quickly developed. Don’t blame the Kansas Supreme Court for this. The Court did not create the situation, but rather pointed out that distributing funds inequitably does not meet constitutional muster, and ruled that lawmakers must fix it.

If Kansas had retained a properly funded school finance formula, no families would have worried about whether schools would open in August. A special session should never have been necessary.

In the crisis atmosphere of a special session, lawmakers managed to add enough money to keep schools open—certainly a positive thing—but by counting on one-time dollars from the hoped-for sale of the Kansas Bioscience Authority. Their solution may last through the November elections, but not much longer.

For three years running, Kansas has not received enough revenue to pay bills, leaving the general fund bank account utterly empty. Kansas has a rainy day fund on paper, but without money in it. The highway fund has borrowed to its limits, with road maintenance cut to a fraction of normal, bridge maintenance cut in half, and many construction projects cancelled.

Each month, as revenue falls short of expectations, something more must be cut. In March the cuts fell on universities, then on road projects, then on hospitals and doctors who provide Medicaid services, then on the universities again. Finally, to finish the fiscal year at the end of June, the governor simply decided that millions of dollars in bills would go unpaid, pushing them off for payment in a future fiscal year.

In January, the next Legislature will face the daunting task of building a new budget in which even a constrained set of expenses outpaces revenue by hundreds of millions. Plus, those future legislators will be saddled with the bills that current legislators and the governor left unpaid this year.

What happens when the next recession comes? What happens as roads and bridges continue to deteriorate? What happens as rural hospitals close? What happens as school funding proves to be inadequate? Kansas is ill-prepared to deal with any of it.

Scraping by for a time, tapping savings, and using up one-time resources might be justified if those tactics were a bridge to a more permanent solution. But there is no correction in place, no fix ready to kick in. The current financial trajectory leaves Kansas destined to stumble from crisis to crisis, dealing constantly with financial uncertainty.

Special sessions. Fights with the Court. Schools on the brink. Unwelcome national publicity. Bills paid late. Waiting lists for services. Deteriorating bridges. Get used to it, Kansans, because this will be our new normal unless we chart a different financial course.

—This post originally ran in a variety of Kansas newspapers last weekend.

Friday, July 1, 2016

The Big Shift

The income tax cuts of 2012 that continue to wreak havoc on the Kansas budget did not actually yield a reduction in taxes for many Kansans. Lawmakers raised other taxes and fees to partially offset the loss of income tax revenue. The net result: Wealthy Kansans still benefitted, but the overall tax burden for a wide range of working Kansans went up.

The newest shift cropped up at the end of the legislative session. As a result of income tax cuts, Kansas cannot afford enough highway patrol troopers, so legislators passed a bill to raise vehicle registration fees to cover the cost of hiring more.

But that’s a small example of the shift in progress. The following list shows the more consequential changes implemented in the attempt to compensate for income tax cuts:
  • Sales tax raised from 5.7% to 6.15% and then raised further to 6.5%
  • Renters no longer eligible for homestead property tax refunds
  • Food sales tax rebates limited
  • Child care income tax credit, along with many other credits, eliminated (for those who still pay income tax)
  • Cigarette tax raised
  • Many income tax deductions limited (for those who still pay income tax)
The chart below estimates the average net effect of all the tax changes. (The figures come from the Institute for Taxation and Economic Policy, which has the best model for measuring these types of changes in any state.)

Kansans with the lowest income have seen their tax burden go up. For middle-income Kansans, it’s been about a wash. Upper-income Kansans, especially those earning more than $500,000 annually, have come out well.

Of course, a sales tax hike takes a far bigger bite out of a small income than a large one. Lower- income Kansans spend a much higher proportion of their resources on food and other items subject to sales tax than wealthy Kansans do. Many states exempt food purchases from sales tax, or at least apply a lower rate. Not Kansas. We now have the highest sales tax rate on food in the nation.

The chart does not even count other kinds of shifts taking place. Property taxes push up as schools and local governments try to react to dwindling state resources. Tuition rises at universities when the state withdraws support. Future taxpayers get saddled with debt because the state borrows to pay for retirement system costs, and borrows through the highway fund to shore up the general fund.

However, even with all this shifting, Kansas remains broke. The hole created by the income tax cuts has been so significant that shifts to other tax sources have not come close to stabilizing the state’s finances.

Income tax cuts benefitted the wealthiest Kansans, but without any obligation to create a job or even spend their tax savings in Kansas. In return, the state received financial turmoil. Many Kansans now pay more to fund state government at the same time that school class sizes go up, and highway maintenance gets put aside.

If you are a Kansan and do not feel like you’ve had a tax cut, that’s because you probably did not get one.

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

Friday, June 10, 2016

Set Up for More Financial Trouble

Expect financial turmoil in Kansas to continue.

Lawmakers left Topeka after approving revisions to the budgets already in place for FY 2016 and FY 2017, but failed to solve the underlying problem facing the state.

As a result of unaffordable tax cuts, Kansas does not receive enough revenue to pay bills.
Here’s the high-level general fund profile for FY 2016 based on legislative action:

Now let’s go one step further and break out the one-time transfers from total revenue:

The FY 2016 budget that lawmakers passed has a large structural imbalance, and would leave the general fund $140 million below zero at the end of the fiscal year. To avoid the negative ending balance, lawmakers are expecting the governor to use his powers to transfer yet another $70 million from the highway fund. That would technically increase general fund revenue, but it’s more one-time money that does not narrow the structural imbalance. Lawmakers also expect the governor to “delay” a $96 million payment to the retirement system until FY 2018, which would lower total expenditures in FY 2016 but increase expenditures in FY 2018.

Now, look at FY 2017 based on the recent legislative budget action:

Again, let’s go one step further and break out the revenue projection to show one-time transfers:

The FY 2017 budget also has a large structural imbalance, and a negative ending balance. Lawmakers are expecting the governor to order an additional transfer of $115 million from the highway fund, and to also cut expenditures (details of the cuts unknown) enough to avoid the negative ending balance.

Now consider FY 2018. When lawmakers convene a new legislative session in January, they must create a brand-new budget for FY 2018. How will that work?

Recurring revenue in FY 2017 totals $5.9 billion. With luck, that might grow a little in FY 2018, but under current policy, hoping for much more than $6.0 billion would be quite optimistic. Legislators set expenses for FY 2017 at $6.324 billion, but in FY 2018 expenses will be higher. The 4th quarter KPERS payment from FY 2016 must be paid. Add $96 million plus 8 percent interest for that. Medicaid costs will go up $60 or $70 million, maybe more. Of course other costs will rise as well, but just the Medicaid and KPERS increases alone will push expenses to $6.5 billion, far above recurring revenue. And the bank account will be empty and the highway fund tapped out.

Will lawmakers be able to address problems in the budget like staffing shortages at state hospitals and prisons? Not without making the overall financial situation worse.

What if happens if the Kansas Supreme Court declares school funding constitutionally inadequate? The state will have little recourse.

What happens if the economy actually goes into recession? Everything gets worse.

The Kansas budget has been structurally unbalanced every year since the 2012/2013 tax cuts went into effect, putting the state in a highly precarious financial situation. Budget actions in this legislative session did not address or correct that.

The state’s grim financial prognosis will persist until the underlying problem gets fixed.

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

Friday, May 13, 2016

Unseat the Illiterates

Governor Brownback declared April to be Financial Literacy Month in Kansas. Yes, that’s true, although unbelievably ironic given the state’s current financial condition.

But don’t fault the governor for making such a declaration.

The purpose, to encourage Kansans to be well-prepared to manage money, credit, investments, and debt, is a fine idea. The concept of a financial literacy month has been promoted nationally, and other governors made similar declarations.

Kansas even has a website,, devoted to improving financial literacy. During April, Kansans had the opportunity to win an I-pad mini by registering on the site, and filling out five learning modules “designed to increase your financial IQ.”

Do fault the governor, though, and the legislators backing his policies, for ignoring the very principles they believe the rest of us should use in our own personal financial management.

Take stock of what happened in Kansas during our April financial literacy month. The official revenue estimate was revised downward, plainly showing that Kansas does not have enough income to pay bills. But that’s no surprise. The Kansas budget has been upside down ever since the governor’s “fiscal experiment” kicked in three years ago, dramatically lowering income to the general fund.

The state has survived financially only by using up every dollar in the state savings account, by raiding other funds to shore up the general fund, and by borrowing. Now the governor proposes more of the same.

Here’s one of his solutions: Make only three quarterly payments into the retirement system this year, but promise to make the fourth payment next year, or the year after. Kansans, try that kind of maneuver with your personal finances and see what happens. Call your mortgage company and say you just can’t make 12 house payments this year, so you’ll do 11, but promise, promise, promise that next year you’ll do 13. Don’t expect to win an I-pad mini.

Or get this: The governor’s preferred option would sell future income that Kansas receives from the nationwide tobacco settlement, income that currently pays for early childhood programs. That amounts to a giant payday loan with a terrible interest rate. Kansas would receive a lump sum payment to plug the budget hole this year, but would pledge a much greater sum in future paychecks to pay off the loan.

And this: The governor has announced the cancellation of many planned road projects. Highway maintenance and bridge repair efforts have already been zapped. All so that even more money can be taken from the highway fund to pay general fund bills.

The governor’s “solutions” leave Kansas poorer and less flexible while insuring that the state’s budget problems will repeat the very next year. If you do not have enough money to pay your bills, cleaning out your savings account or taking out a high-interest payday loan or no longer maintaining your house and car will not fix your problem. That’s financial literacy 101.

The governor and lawmakers are flunking state financial literacy, and Standard and Poor’s essentially told them so at the end of April by putting Kansas on a negative credit watch. Kansas already has one of the least favorable credit ratings for U.S. state governments. S&P warned that if Kansas opted for more gimmicks over real solutions, the state’s credit rating, its financial report card, would notch down again.

Election season looms with every Kansas House and Senate seat on the ballot. It’s nice that April was designated for citizens to improve their financial literacy, but it seems most Kansans already have a better grasp than their lawmakers. Before voting, check out legislative candidates carefully. If a candidate supported Brownback’s fiscal experiment and wants to stay the course, being a financially literate voter requires marking your ballot for somebody else.

—This post originally ran in a variety of Kansas newspapers last weekend.

Thursday, April 28, 2016

Kansas Budget Goes Deeper Underwater

Kansas revenue forecasters just lowered expectations for tax revenue In FY 2016 and FY 2017 by $348 million, putting the budgets for those two years deeply in the red.

Make no mistake. The problem directly results from steep income tax cuts enacted in 2012 and 2013.

Note the chart below. In FY 2013, general fund tax revenue reached a high of $6.333 billion, and then fell to $5.632 billion in FY 2014 after the income tax cuts were fully implemented. Tax revenue stayed at that low level in FY 2015, growing only a scant $85 million. The revised revenue estimate now predicts tax receipts will grow to $5.865 billion in FY 2016 and to $6.039 billion in FY 2017. But remember, that growth only occurs as result of tax increases, passed in the last legislative session, that were supposed to be worth more than $375 million each year.

Again, tax revenue fell sharply in FY 2014, and has never come close to recovering, even after lawmakers imposed the biggest tax increase in Kansas history. Yes, current economic conditions have some effect on revenue collections, but it’s the 2012 and 2013 income tax cuts that have brought down the state budget.

Let’s plug in the new revenue estimate to analyze the effect on FY 2016 general fund finances. The result: With just over 2 months left, the FY 2016 budget is now $137 million underwater. That deficit occurs after a $17 million cut to universities in March, after numerous other program cuts, after freezing school funding in a block grant, and after transferring $280 million from other funds. And that’s after raising the sales tax to the point where Kansas has the highest sales tax on food in the nation.

Now look at FY 2017. Same story. Assuming the governor and legislators somehow erase the FY 2016 deficit, FY 2017 will open on July 1 with a beginning balance of zero, but estimated revenue does not nearly pay for the scrunched-up expenditures approved for FY 2017, leaving an ending balance $174 million below zero.

Between now and the end of June 2017, lawmakers will have to somehow adjust the budget by more than $300 million, not so that Kansas can flourish, but so that Kansas can just barely scrape by with no money in the bank.

This situation will keep repeating itself and continue to drag Kansas down, until lawmakers go to the source of the problem and correct it.

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

Kansas Needs a ‘No Excuse’ Revenue Estimate

General fund tax collections have failed to meet the mark every month but one in FY 2016. Each instance has triggered expressions of anguish, frustration, and despair, because every miss means something negative—more money transferred away from children, cuts to higher education, lost hope for public schools, or crumbling roads.

Kansas finances have become a high wire act with no net. Lawmakers have an empty bank account and limited options when revenue collections underperform. The financial hole stemming from the 2012 income tax cuts is so deep that even two sales tax rate hikes did not balance the budget.

The revenue estimating misses in FY 2016 follow a rocky record in FY 2014 and FY 2015, mostly a result of inaccurate forecasts of income tax receipts. In FY 2014, the consensus estimate at one point predicted income tax receipts would reach $2.525 billion, but when the fiscal year ended, collections only totaled $2.218 billion—a $307 million miss. In FY 2015, estimators again predicted income tax receipts would hit $2.525 billion, but the actual amount turned out to be $2.277 billion—a $248 million miss. The same pattern may be taking place in FY 2016. The current estimate predicts $2.450 billion, but through March the state has fallen behind last year’s pace.

Granted, establishing an accurate and predictable revenue trend does not come easily when tax policy changes dramatically, or goes where no state has gone before. But the excuses being offered for the recent estimating misses don’t add up.

Multiple administration sources have tried to place the blame on a bad economy. Yet, that does not explain the forecast errors. The revenue estimators had a realistic view of the economy last November. Read their report, and some sample excerpts below:

“Most major economic variables and indicators have been adjusted downward since the Consensus Group last convened in April.”

“Kansas Gross State Product (GSP) growth for 2015 has been reduced to 1.2 percent from the previous estimate of 2.3 percent.”

“Specific to the Wichita area, neither total employment nor manufacturing employment has returned to pre-Great Recession levels.”

“The forecasted price per taxable barrel of Kansas crude has now been reduced to $35.”

The weakening Kansas economy is not a surprise.

Lately, the governor has tried to blame the estimating process itself, intimating that some different method would work better. Don’t buy it.

The Consensus Revenue Estimate (CRE) is a consensus between the State Budget Director (on behalf of the governor) and the Director of Legislative Research (on behalf of the legislature). The two directors and their staffs receive economic data and advice from 3 consulting economists, and they rely on tax data and advice from the Secretary of Revenue.

Nothing gets into the CRE without agreement from the governor’s budget director. Everything in the CRE is based on tax information brought by the Secretary of Revenue. The governor is not a victim of some broken process. Key people in his administration are in charge of it.

The governor’s budget director and revenue secretary have been architects and supporters of the governor’s tax plan. They wanted a different revenue outcome from the one we have, maybe even truly believed in a different outcome, and perhaps that is why they have had so much trouble getting the CRE low enough. Sinking tax collections continue to put the lie to the original promises.

Huge income tax cuts, benefitting mainly the wealthy, have not brought economic prosperity to Kansas. Rather, those unprecedented tax cuts have wrecked the state budget.

Kansas does not need a change in the process of estimating revenue. What our state does need is for the key players to provide a hardheaded assessment of what really is going to happen, not what they hope will happen.

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

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