Time to Reset the Revenue Barometer

The national coverage of Kansas' budget crisis continues.

This one is from the Daily Beast: "Sam Brownback's Kansas Catastrophe." 

By Duane Goossen

A huge drop in state revenue collections has occurred.  The dramatic changes to Kansas tax policy hit full force in fiscal year 2014, bringing total State General Fund receipts down $688 million from FY 2013 levels.  

For months we have been learning how far revenue has fallen, but now we need to reset our revenue barometer for a new fiscal year.   

The first monthly revenue report of FY 2015 arrives July 31.  How do we judge how the state is doing financially?  

The key:  watch to see whether individual income tax receipts are higher than they were in FY 2014. 

The FY 2015 budget is based on an estimate that revenue will rise more than $300 million, mostly from income tax gains.

If revenue grows $300 million, the state will just barely be able to cover approved FY 2015 spending and finish the fiscal year with a bank balance just above zero.  That’s a very poor financial position to be in, but at least mid-year budget cuts can be avoided.

On the other hand, if FY 2015 revenue only matches the amount received in FY 2014, the approved budget will have to be cut to keep the State General Fund solvent. Receiving the same amount of revenue in FY 2015 as in FY 2014 will not mean that the state’s financial situation has stabilized.  It means it’s getting worse. (The FY 2016 budget is in very big trouble no matter what happens in FY 2015.)  

Don’t count on the Kansas Department of Revenue to interpret what is happening.  The Department’s track record for accurately explaining revenue reports during FY 2014 has been unreliable, reaching a low point when April revenue declines were blamed on President Obama.

Use the chart below to assess revenue each month.  Pay the most attention to income tax receipts, but don’t concentrate too much on any one month.  Things like paycheck withholding can vary a bit.  Look for the trend.

Remember, the big drop in revenue occurred in FY 2014. If revenue now stays down at that level and does not grow substantially, immediate surgery needs to be done on this year’s budget.  

Don't Believe the Revenue Estimates — Kansas' Budget Has Already Gone Off the Fiscal Cliff

By Duane Goossen

The Kansas budget appears to be teetering on the edge of a fiscal cliff, but that’s an illusion. 

We’ve already gone over the edge.

Lawmakers approved a budget for fiscal year 2015* that spends $326 million more than the state officially expects to take in.

Covering that $326 million difference almost completely drains the balance in the state’s bank account.  That brings us to the edge of the cliff.

What happens if the FY 2015 revenue does not arrive as estimated?

With the bank balance tapped out, current year spending — already too meager in many areas like education — must be cut, and cut late in the fiscal year when it’s difficult for agencies to make quick adjustments.

That takes us over the cliff.

The official revenue estimate in place for FY 2015 is too high.  The estimate was produced in April with incomplete information about how the dramatic tax policy changes in Kansas had affected FY 2014 income tax receipts.

The chart below shows actual receipts for FY 2013 and FY 2014, and the estimate for FY 2015.  While most of the revenue categories in the FY 2015 estimate are likely reasonably accurate, the individual income tax is not.  (The corporate income tax estimate is possibly a tad too high, and the insurance premium tax estimate perhaps a bit too low.)

In the official estimate, the estimators predicted individual income tax receipts would be $2.525 billion in FY 2014 and then dip slightly to $2.519 billion in FY 2015.

We know now, though, that individual income tax receipts fell $713 million in FY 2014, bottoming out at $2.218 billion.

Is it realistic to believe that income tax collections would fall $713 million one year and then rise back up $301 million the next, especially when additional tax rate reductions are kicking in at the same time?** 

Of course not.

So why is anyone using this unrealistic revenue estimate? Because it allows for the illusion that the Kansas budget has not already gone over the cliff. It allows that illusion to persist until the revenue estimators meet again to formally revise and update the FY 2015 estimate — something that won't happen until November.

Even if the official FY 2015 revenue estimate turns out to be accurate, the state will arrive at FY 2016 with expenditures more than $300 million above receipts. FY 2016 expenses will be going up to deal with the required increases of Medicaid and KPERS.***

  

FY 2016 revenue will at best be flat as even more income tax rate reductions kick in.  The bank account will be empty.  Something will have to give.

And that’s the optimistic scenario.

Footnotes

* Fiscal Year 2015 is July 1, 2014 to June 30, 2015.

** The top income tax rate drops from 4.9 percent for tax year 2013 to 4.8 percent for 2014 and to 4.6 percent for 2015.  The lower rate drops from 3.0 percent in tax year 2013 to 2.7 percent for 2014 and 2015.

*** KPERS stands for the Kansas Public Employees Retirement System. 

A Flurry of National Media Coverage of the Kansas Budget Crisis

By Duane Goossen

If running smoothly, the Kansas budget should not attract attention outside Kansas.

But in recent weeks, the Kansas budget has been featured in many articles by national news sources — from media staples like The Wall Street Journal and The New York Times, to niche sources like The Christian Century.

Why? Because Kansas has strayed far from normal budget practices. Among the 50 states, Kansas is an extreme outlier on the spectrum — and that attracts attention.

In 2012, Kansas cut its income stream so severely that revenue no longer comes close to covering the state’s basic expenses.  For the fiscal year that just ended on June 30, Kansas made up the difference between income and expense by drawing down the state’s savings account.

However, the income and expense gap is growing very quickly. The state’s savings account will be tapped out before this fiscal year is over.

A very serious budget situation is upon us right now.

Here’s a reading list that highlights a few of the articles:

→  Start with this piece from Governing Magazine, “What’s Wrong With Kansas Tax Reform,” (April 2013).  This dates back more than a year, but even by then — well before Kansas experienced the full effect of the new tax policy — experts representing both left and right ideological perspectives were saying that the Kansas approach to tax reform was the “worst” in the nation.

→  A New York Times column “Yes, If You Cut Taxes, You Get Less Tax Revenue,” (June 27, 2014), gives a detailed and clear account of why Kansas tax policy isn’t working.

→  The Washington Post, “Tax cuts In Kansas have cost the state money, and job creation’s been terrible,” (June 27, 2014), discusses what the tax policy has meant for jobs.  Look especially at the chart. 

→  The Wall Street Journal “Sam Brownback’s Tax Cuts Push Kansas Out on Its Own,” (June 10, 2014), reports that the Kansas situation is a “warning” rather than a “beacon” to other states.

→  The New York Times columnist Paul Krugman, a Nobel prize-winning economist, takes on the rationale for the Kansas policy changes in a particularly hard-hitting piece “Charlatans, Cranks, and Kansas,” (June 29, 2014).    

→  Vox.Com, a relatively new but growing online national news outlet, gives us an account of how the Kansas tax policy came to be and the effect it is having: “Kansas was supposed to be the GOP tax-cut paradise.  Now it can barely pay its bills.” (July 8, 2014).

→  From the Los Angeles Times: “How tea party tax cuts are turning Kansas into a smoking ruin,” (July 9, 2014).  The article admonishes other states to look carefully at Kansas and then  “run the other way.

→  And yesterday the New York Times editorial board excoriated the administration of Gov. Brownback: "Kansas’ Ruinous Tax Cuts" (July 13, 2014). The board writes: "There was only one reason for the state’s plummeting revenues, and that was the spectacularly ill-advised income tax cuts that Mr. Brownback and his fellow Republicans engineered.".

→  Finally, a Christian Century editorial, “A state budget’s (elective) surgery,” (June 17, 2014), makes the point that the Kansas financial situation results from “elective surgery.” 

The Christian Century is right.  The potent budget problems Kansas now faces did not result from a recession or some other uncontrollable circumstance.  Through our present set of leaders, Kansas chose this situation.

Don’t Blame Capital Gains for the Revenue Collapse

By Duane Goossen

Kansas just experienced a huge revenue downturn.  State General Fund tax revenue has dropped more than $700 million in fiscal year 2014 (which closed on June 30, 2014) from the year before.

This one-year revenue decline already eclipses the income losses Kansas faced over the entire Great Recession when revenue fell $618 million during a three-year period (FY 2007 to FY 2010).

Receipts plummeted because FY 2014 individual income tax collections were down significantly — $712 million or 24.3 percent.

The Kansas Department of Revenue has advanced an unsubstantiated explanation for the income tax drop that cites a shift of capital gains income as a key cause.  The department's argument is this:  In December of 2012, it seemed probable that the federal government would raise tax rates on capital gains income in 2013. According to KDOR's argument, that caused large investors to declare some of their capital gains income early — in 2012 rather than 2013 — to avoid potential higher taxes later. That, said KDOR officials, then led to lower-than-normal capital gains income claimed in tax year 2013 and hurt Kansas tax collections in FY 2014.

To some degree, this capital gains tax shift likely did happen in every state, but can it possibly be the key cause of a $712 million income tax collection drop in Kansas?

The chart below helps to lay out the parameters of what may have occurred, by showing the most recently available Kansas capital gains income information, compiled and publicly posted by the IRS.

Over the ten-year period shown, Kansas capital gains income averaged $2.8 billion per year — just 4.36 percent, on average, of the adjusted gross income reported on U.S. income tax returns from Kansas.  

Capital gains have never been a large part of Kansas income.  The complete disappearance of capital gains income could not cause the kind of collection downturn that Kansas has just experienced, and here is why:

Let's assume for a moment that $3 billion in capital gains income shifted from the 2013 tax year to 2012.  

(That’s actually highly improbable, because $3 billion would be the entire amount of capital gains income in a “normal” or average year, and certainly not all capital gains income shifted. Even so, let's make the assumption.)

If such a shift had not occurred, how much more income tax would Kansas have collected for the 2013 tax year?  If Kansans had claimed another $3 billion of income for 2013 and that income had been taxed at the upper rate of 4.9 percent (the highest rate in place for tax year 2013), at most $147 million would have been added to state income tax collections in FY 2014.

The administration's argument therefore cannot be accurate.

Even $147 million in additional tax receipts — an overly generous assumption — would not have stemmed the tide of our state's $712 million revenue drop.

A capital gains shift may have played a small role, but it should be obvious that the large majority of the income slide resulted from dramatic changes in Kansas tax policy. 

(Note: We will not have the information to make an exact capital gains shift calculation for a year and a half. The IRS will add 2012 data later this fall and 2013 data in the fall of 2015.)

In any case, we already know what the latest revenue report means for the Kansas budget:

• Kansas revenue has fallen dramatically.  

• Spending exceeded revenue by hundreds of millions in FY 2014 and will do so again in FY 2015.  

• The state’s bank balance will be gone in less than a year.  

• More budget cuts are ahead.  

• Education and other programs are at high risk.

Kansans, we have a very large problem on our hands!