Monday, September 29, 2014

A Regressive, Math-Challenged, Five-Year Plan

By Duane Goossen

Kansas revenue has dropped dramatically and no longer comes close to covering expenses. Standard & Poor’s and Moody’s have downgraded the state’s bond rating because the gap between revenue and expense has grown very wide following the implementation of Gov. Sam Brownback’s tax plan.

Under the governor’s tax policy, what happens if Kansas only maintains current spending levels, adding just enough each year to cover growing bills for a few things that must be paid (such as Medicaid)?

Kansas Legislative Research Department (KLRD) estimates show that within five years, the state bank balance would be $1.284 billion below zero. But the state is not allowed to go in the hole. Something must give. The gap will have to be closed.

But how?

The Kansas Policy Institute (KPI) believes they have an answer in a recently issued five-year budget proposal. Pay attention, because it provides one example of what the governor’s tax policy may mean for the future, and given KPI’s close ties to the governor, this plan may be what he intends.

Using the $1.284 billion below zero estimate from KLRD as a starting point, KPI advocates both revenue and expenditure changes over a 5-year period to get to a positive $1.131 billion balance.

That’s a $2.416 billion swing. The chart at right shows how they do it.

Wow! A billion dollars from the Highway Fund. It’s possible to add to the State General Fund in that manner, but there is an offsetting consequence: a billion dollars of cuts to road maintenance and highway projects. (Note that the Dept. of Transportation just borrowed $250 million this summer, and still has an outstanding principle balance of about $2 billion on previous borrowings.)

And what happens for public education and higher education if there indeed is a willingness to take a billion from the Highway Fund? In the KPI plan, public education gets a $148 million cut in state funding this fiscal year, higher education gets a $38 million cut in this fiscal year, and then they both go nowhere. Stuck.

That’s how bad the budget outlook is.

A billion dollars out of the Highway Fund and the associated transportation cutbacks do not yield new investment in education or anything else. It just props up a broken State General Fund.

And then there is the matter of the math error. (*See below.) Another $802 million must be cut from somewhere — education, state employees, prison system, etc. — to arrive at the balance claimed by KPI. And that’s in KPI’s optimistic scenario, which has revenue growing by $321 million in FY 2015. If, in the likely event that revenue comes in lower, more unspecified cuts would have to be applied in addition to the $802 million.

Take notice, Kansas.

Kansas public education, state universities, Highway Fund supporters, and the unnamed recipients of an $802 million looks like you are the “beneficiaries” of the Kansas fiscal experiment.

* The KLRD model can be used to show that the ending balance would be $1.284 billion below zero in five years without adjustments. But remember, the balance is not allowed to go below zero, so in the KLRD model, spending is reduced enough each year to get to a zero balance. KPI starts its calculations from the spending assumptions in the KLRD profile and fails to identify $802 million in cuts that in the KLRD model are assumed to already have been made, somewhere.

Monday, September 22, 2014

Kansas Out on the Edge

By Duane Goossen

Remember how state revenue plummeted in April, May, and June? Well, we finally have information that compares the Kansas experience to that of other states.

No other state dropped as far as we did — yet more evidence that Kansas is out on its own at the very end of the spectrum.

The Rockefeller Institute of Government — the go-to source for information about state revenue collections — just issued numbers on what happened across states in the April-May-June quarter.

Kansas income tax collections came in 43 percent below the same period a year earlier. We already knew that, but we did not know how Kansas compared to the rest of the nation.

The answer: Kansas had the steepest drop of all states in both individual income tax and in combined revenue.

Nationally, the average income tax decline was 7.1 percent. Income tax collections in most states went down somewhat, confirming that the timing of capital gains income likely played a small part in the Kansas decline.

However, given that the Kansas drop-off was comparatively so large, these new numbers clearly show that the Kansas decline had far more to do with tax policy changes.

The Kansas Department of Revenue wanted us to believe the drop in that period was all about capital gains, when it simply was not. That should make reporters and everyone else very cautious about taking at face value what the Department says, particularly as reports about September revenue collections emerge.

The Department has political incentive to make the September numbers look as high as possible, and has been working to settle outstanding tax collection cases — so watch carefully for one-time receipts that are counted into the total.

Also: watch carefully what the state does with revenue transfers. Delaying scheduled transfers makes monthly revenue appear higher, but only temporarily.

Kansas revenue went down $688 million in fiscal year 2014 and it's staying down at that level now during FY 2015. More income tax rate reductions are scheduled to kick in all the way through 2018, further depressing receipts. Revenue no longer comes close to covering expenses.

The dramatic changes in Kansas tax policy have caused budget problems and service reductions, but so far the effect has been softened by spending down the state bank account to cover the difference between revenue and expense. The bank account will be gone within this fiscal year.

The most profound consequences of Gov. Brownback's tax policy are still yet to come.

Monday, September 15, 2014

An Unfair Tax Policy

By Duane Goossen

Kansans like things that are fair, practical, and commonsense — but those words don't describe Gov. Sam Brownback’s tax plan. 

Low-income Kansans pay more. The wealthiest Kansans receive a huge break without any requirement to keep their newfound tax savings in Kansas. The resulting revenue shortfall has put the state budget on a path to default.

The governor’s tax plan, which passed the Kansas Legislature in two phases, simultaneously decreases some taxes and raises others. The net effect is a dramatic reduction in state revenue. 

The plan decreased state revenue significantly by lowering income tax rates, and entirely eliminating state tax on business “pass through” income. Those revenue decreases were partially offset by keeping the sales tax rate at 6.15 percent instead of letting it drop to 5.7 percent, and by limiting income tax deductions and credits. (A March 27 article from the Center for Budget and Policy Priorities provides more detail and discussion.)

Kansans do not benefit from the tax changes equally.

A revealing graphic from the Kansas Center for Economic Growth shows who paid and who benefitted in tax year 2013, the first year of the plan.

Lower income Kansans get an income tax rate cut, but pay more in sales tax. They are no longer eligible for refundable food sales tax credits and homestead property tax credits for renters. Net outcome: They pay more taxes to the state. (Steve Rose gives examples in a May 3 Kansas City Star editorial.)

Middle income Kansans receive the income tax rate cut, but their income tax deductions are limited, and they pay more in sales tax than they otherwise would have. Their net outcome is a slight reduction in overall tax payments that many likely did not notice.

Upper income Kansans pay the higher sales tax rate and have more limited deductions, but the benefit from income tax rate reductions far exceeds any new tax costs. Upper income taxpayers often have a more complex structure for receiving income, also allowing many to benefit from the elimination of tax on “pass through” business income. (Josh Barro, in a June 27 New York Times piece, uses himself as an example to provide an understandable account.)

All Kansans bear the brunt of the state budget problems that are now playing out because revenue has dropped so dramatically. K-12 education has been hurt by reduced funding to classrooms. Human service programs have been cut. The Highway Fund has been tapped to pay for other things. 

And even still, the budget does not balance.

Monday, September 8, 2014

Kansas Revenue Remains in Critical Condition

By Duane Goossen

Don’t be misled by campaign season rhetoric.

Income to the State General Fund (SGF) remains critically low. As a result, Kansas is headed toward current year spending cuts that will affect education and other key programs.

Here’s the summary: In FY 2014, SGF revenue dropped dramatically — $688 million from the previous fiscal year. In order for the SGF to barely stay solvent this fiscal year, revenue must rebound by $300 million. If revenue does not grow, spending will have to be cut. After the first two months of FY 2015, receipts are below the FY 2014 level. Revenue went way down in the last fiscal year, and is staying down.

The Kansas City Star was on the mark with its September 2 editorial about revenue collections.

For readers who want to dig deeper into the numbers: Look first at the current FY 2015 SGF budget summary below. Kansas began FY 2015 two months ago with $380 million in the bank. The official revenue estimate of $5.974 billion (established last April with incomplete information about individual income tax receipts) is $321 million higher than the amount received in FY 2014.

Approved spending has been set $351 million above the optimistic revenue estimate. Even if the revenue estimate somehow comes true, the state will end FY 2015 with a dangerously low $29 million bank balance.

Now look at the figures below comparing receipts from the first two months of FY 2015 to that same period in FY 2014. Revenue is flat and not on track to grow. In fact, the FY 2015 amount of $764 million is artificially high because $34 million in transfers — transactions that reduce revenue — were not made as planned in August, and instead will reduce revenue in some future month.

Revenue during September is likely to follow the same pattern. For taxpayers making quarterly income tax payments, the third quarterly installment is due in September. Quarterly payment amounts in April and June were significantly below previous years. Low quarterly payments in September could easily cancel revenue gains that might come from sales tax or corporate income tax.

FY 2015 looks bad, but it’s only a warm-up for FY 2016. Expenses will keep growing, but even more income tax rate cuts are set to take effect all the way through 2018. The governor’s tax plan has produced a dismal outlook for the State General Fund.

Monday, September 1, 2014

Get a Grip, Regents

By Duane Goossen

I was struck by the recent comment of a University of Kansas official: “Flat is the new up.” He was referring to state funding for Kansas higher education, and the now diminished hope for what the state can provide.

He’s right, of course. Flat funding is the best that the Kansas higher education system can expect. But even that has become a high bar and an unlikely outcome.

Current state financial policies have placed resources for kindergarten through 12th grade education in severe jeopardy, but post-secondary education is even more vulnerable. Look where things are now:

In actual dollars, state funding for higher education reached a high in fiscal year (FY) 2008, then took a big hit during the Great Recession and has floundered since. As the chart shows, support goes up $28 million in the approved FY 2015 budget, but before getting too excited about that, consider that the FY 2015 amount — $794.1 million — is $35 million less than 7 years earlier.

Is the FY 2015 appropriation even realistic? Can state support grow enough to get back to where it once was?

Revenue to the State General Fund has been reduced so severely that spending in the approved FY 2015 state budget is $351 million above expected income. If revenue comes in as estimated, the SGF can just barely stay solvent by using up the remaining balance in the state bank account. However, the official revenue estimate was completed last April with incomplete information and is far too optimistic. A much more likely scenario requires current fiscal year spending cuts.

For FY 2016 and beyond, the state faces a situation in which the revenue stream will be hundreds of millions below current spending levels. Unavoidable expenses like Medicaid will continue to rise, even as more income tax rate reductions take effect and further restrict revenue.

State finances are badly out of balance. Something will have to give way.

Get a grip, Regents! You are headed down a rocky path. The current set of state policies has made your state support anemic, and will hurt higher education even more in future budgets.

Watch out, students and parents! The direct result of declining state support is higher tuition and more fees. That’s been happening, and it will get worse.

Brace yourselves, Kansans! We have had a higher education system that we can be proud of, but that won’t last if we do not nurture and invest in it.

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