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.

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