Tuesday, December 19, 2017

Can't Kick Kansas Around Anymore

Hello United States. Hello from Kansas. It appears that Congress and the President are about to enact a Kansas-style income tax cut for the nation. Good luck with that.

Kansas went down that road six years ago and ended up with a budget-busting, economic-deadening disaster. Our reputation got kicked around for it, too. The national press focused on telling the story of the Kansas tax experiment, and, as our financial decline deepened, we had to absorb disdain and snickering from around the country: "Haha, what were you all thinking? How could you harm yourselves like that? Don't ever do what Kansas did."

But now as the whole United States is about to do just that, Kansans are done taking guff about self-destructive tax policy.

You see, in Kansas we dealt with our trouble. "We mopped up our mess." Kansas citizens educated themselves, saw the mistake, and corrected it. Kansans did not figure it out in time to keep from narrowly re-electing Sam Brownback in 2014. By 2016, though, Kansans were upset enough to change the Legislature and give the tax experiment the big boot.

To be sure, much work remains to bring Kansas back to financial health. And while surveys show that a large majority of Kansans now believe our tax cuts were wrongheaded, not everyone owns up. Note, for example, our out-of-touch congressional delegation casting votes for the U.S. tax plan. Or the hometown Koch-funded Kansas chapter of Americans for Prosperity spending a million dollars to mail Kansans mega-numbers of postcards bashing legislators who successfully voted to reverse the Brownback tax plan.

Even so, our hard-won experience and newly-achieved turnaround allow us to offer lessons:

First, tax cuts don't pay for themselves. The revenue loss from the Kansas tax cuts was steep, immediately throwing the state budget badly out of balance. The U.S. tax cut plan will add more than a trillion dollars to the national debt and threaten Social Security and Medicare, just as the Kansas plan threatened public education and highways.

Second, tax cuts for the wealthy don't trickle down. The Kansas plan primarily cut taxes for the wealthiest, while lower-income Kansans ended up paying more. Promised new jobs never arrived. Likewise, corporations and people with substantial "pass through" income benefit most from the national plan.

Finally, and more hopefully, rotten tax policy can be corrected by an engaged citizenry working together in a bipartisan way.

But alas, it looks like the U.S. will pay little heed to Kansas's lessons. The die appears cast. Just don't ever say one more derogatory thing about Kansas.

Kansas is a special state and a fine place to live. The prairie is beautiful. We place high value on public education. Kansans are friendly and hard-working. And practical. Deep down we know we have to have enough income to balance our budget and pay for the quality of life we value. We lost that balanced approach during our tax experiment, but we got it back.

Best wishes to the United States.

—Duane Goossen formerly served 12 years as Kansas Budget Director.

Tuesday, November 14, 2017

Congressional Republicans Repeat the Kansas Mistake

Congressional Republicans have released their "tax reform" plan. Words flow from their summary sheet like seductive whispers: "More Jobs. Fairer Taxes. Bigger Paychecks." What's not to like? The economy will boom. It's for everyone. We can afford it.

Listening to their rhetoric transports many Kansans into the past, to 2012, when we heard those same sweet nothings. Back then Kansas succumbed. Our tax experiment was launched. And what happened next?

Income tax revenue dropped like a rock, creating a perpetual budget crisis that threatened public education, highways, and a host of other services. The promised jobs and economic shot of adrenalin never materialized, leaving Kansas' economic performance lagging neighboring states and the nation. And the poorest Kansans ended up paying more while the wealthiest Kansans got big breaks.

By 2016 Kansans figured things out and changed their Legislature. Then a bipartisan supermajority of lawmakers rescinded the tax cuts with a veto override and started Kansas toward recovery.

After all that, how can it be that every member of the Kansas congressional delegation-every single one-now supports a Kansas-style tax cut plan for the nation?

Lynn Jenkins, your proposed plan includes a huge LLC loophole, something Kansans came to understand as deeply unfair. Actually, the proposed loophole is worse. It may be advertised as benefitting "small business," but it only applies to individuals with "pass through income" in the top income tier.

Kevin Yoder, your bill gives corporations enormous, permanent tax breaks, but does not require one job to be created in return. The Kansas tax cuts had no job creation requirements either. Look how that worked out.

Ron Estes, you were State Treasurer during the Brownback years and never said "boo" about the tax-cut-caused budget trouble. Surely though, now a Congressman, you must realize that the financially unsustainable plan you support adds $1.5 trillion to the national debt, placing huge financial burdens in our future.

Roger Marshall, yes, your plan lowers individual income tax rates for most earners. Kansas did that too. But remember the offsets-personal exemptions, college tuition breaks, and medical and other deductions gone. Netted out, millions of Americans will actually get a tax increase. Any remaining middle-class tax cut amounts to window dressing. Can't you see? Your plan is skewed to benefit the wealthiest, as was the Kansas plan.

Jerry Moran, you managed some plain, honest talk with Kansans on health care earlier this year. Why not do that on taxes too? We've been schooled, and can handle a real discussion.

Pat Roberts, many say you've become out of touch with Kansas. Support for this tax plan certainly proves that true.

The stance of the Kansas delegation highlights a brokenness in national politics. In front of their noses lies a crystal-clear example of a "trickle-down economics" disaster, but to a person the delegation appears unable to understand and engage the very thing that roiled their home state. Instead they read from Sam Brownback's old script and fall into soulless formation with party, apparently intent on dragging Kansas (and the nation) through another tax fiasco.

Our Kansas delegation's behavior is perhaps predictable, but that doesn't make it any less depressing or unforgivable.

—Duane Goossen formerly served 12 years as Kansas Budget Director.

Tuesday, October 10, 2017

Kansas Tax Roller Coaster

Kansans, we have been riding an income tax roller coaster! In 2012 the "Kansas experiment" brought lowered income tax rates and a full tax exemption for business income. Last June those policies were rescinded. Income taxes went down, then up.

Some have been calling the June tax changes the biggest tax increase in Kansas history, completely ignoring what has happened in Kansas over the last 5 years. True, people with business income must now pay tax, but that just brings things back to the way they were before the experiment. Yes, income tax rates have moved higher, but they still remain below 2012 levels.

When a bipartisan supermajority of legislators overrode Gov. Brownback's tax bill veto in June, they did not have a realistic alternative. Kansas was broke. For the whole period of the tax cuts, Kansas lacked enough revenue to pay bills. A promise of economic prosperity created by tax cuts had instead turned into a lingering budget disaster.

Think about what might have been possible these last 5 years if lawmakers had not put Kansas into that tax roller coaster car, if income tax policy had just been left alone in 2012.

Our political energy could have focused on future progress rather than crisis management. Public education could have been adequately funded rather than put at risk. Instead of cancelling highway projects, new jobs could have been created to maintain roads and bridges. Kansas could have moved confidently forward to expand Medicaid eligibility, attracting billions in federal matching dollars and providing health insurance to thousands.

And the onerous sales tax increase of 2015 which pushed the Kansas sales tax on food to the highest in the nation, would not have occurred. A temporary increase in the sales tax which helped Kansas through the Great Recession was set to expire in 2014. Instead, Gov. Brownback and his legislative allies made the temporary rate permanent and added yet another increase on top, all to offset a small piece of the income tax cuts.

The lawmakers who overrode Brownback were courageous and acted in the best interests of Kansas, but they have a lot more to do. Ending the tax experiment stabilized Kansas financially and started to turn things around. But during the experiment, Kansas spent all its reserves, and now the state needs to build back a rainy day fund. Lawmakers also ran up the state debt, and now will have to make payments. The budgets of state agencies, hospitals, and prisons were squeezed hard, and the results of that-a decertified hospital and prison riots-need to be remedied.

Kansas has endured a load of financial trouble and national shame. The most positive thing that can be said about our experience is that we acquired some education. We learned that our experiment in trickle-down economics did not work.

Kansas tax policy should have stayed practical, realistic, and flat like our geography. But that's not what happened. So now we must repair the damage and resolve not to get on the roller coaster again.

—Duane Goossen formerly served 12 years as Kansas Budget Director.

Tuesday, September 12, 2017

Revenue Reset

Gov. Brownback’s tax experiment brought havoc to the Kansas budget, and put the state’s general fund in severe financial distress. But in June, a bipartisan supermajority of lawmakers rescinded those policies in a dramatic veto override and put Kansas back on a more stable financial path.

The chart below tells the basic story:

Income tax receipts took a steep $713 million fall in FY 2014, the first full fiscal year that the Brownback tax cuts were in effect. From a high of $2.9 billion in FY 2013, receipts dropped to $2.2 billion and then stayed down at the $2.2 to $2.3 billion level all the way through the just completed FY 2017. Total tax receipts follow the same basic pattern, although sales and cigarette tax rate increases that took effect at the beginning of FY 2016 made up for a small portion of the income tax loss.

The newly passed tax bill, eliminated the LLC loophole, stopped the March to Zero (a formula in state law for future tax cuts), and moved income tax rates higher, though still below the rates in place before 2012. The new law had only a minimal effect on FY 2017 receipts, but official estimates forecast that income tax receipts and total receipts will now recover enough in FY 2018 to reach revenue levels from five years ago.

But a key question: Are the forecasts of new revenue accurate?

We will not know for sure until May. Big changes to tax law can be quite difficult to forecast with precision. Brownback’s tax policy made LLC pass-through income, self-employment income, rental income, and farm income tax free. But under the new law, income earned from those sources during calendar year 2017 will again be subject to taxation. Normally people owing taxes on that income would make quarterly payments in April, June, September, and January or face a penalty. However, in this changeover year, individuals can choose to skip the quarterly payments without risking a penalty, and make one large payment by next April 15 when they file their 2017 tax return. We will simply have to wait until all those returns are received and counted to know the accuracy of the new forecast.

In the meantime, it’s important to watch each monthly revenue report to understand whether receipts track above or below expectations. But those monthly reports should also be viewed with caution, knowing that a large share of the new revenue may not appear until next spring.

Even with the expectation of new revenue, Kansas finances remain very fragile. Kansas has endured years of structurally unbalanced budgets. Reserves have been decimated, the highway fund compromised, and debt levels dramatically increased. And with school funding costs moving up, basic state expenses will continue to exceed revenue.

By undoing the Brownback tax policies, lawmakers took a huge first step toward recovery, but repairing all the damage will take time. Much more work remains ahead to nurse Kansas back to financial health.

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

Tuesday, August 15, 2017

Make the Medicaid Ticker Stop

Kansas topped $1 billion in forfeited federal funds early in 2016. But the clock kept ticking. Now losses have surpassed $2 billion, and the clock still ticks.

Our failure as a state to adopt expanded Medicaid eligibility continues to cost us dearly, financially, and morally.

Stop reading for a moment, and just watch the live ticker there from the Kansas Hospital Association. This is a running account of funding foregone. Watch as the dollar losses mount—at breakneck speed in just moments. More than $1,000 dollars a minute. More than $1 million a day.

Starting January 1, 2014 Kansas could have allowed 150,000 more Kansans to become eligible for Medicaid health services. The federal government would have paid the whole tab for the first 3 years and then 90 percent thereafter. By now more than $2 billion would have flowed directly into the Kansas economy.

Kansas only needed to say “yes.” Yet year after year Gov. Brownback and his legislative allies have made sure the answer was “no,” not for logical policy reasons, but because expansion was part of Obamacare.

At first many Kansans were also skeptical. But their attitude toward the Medicaid portion of Obamacare shifted as a majority of states—including red states like Arkansas, Kentucky, and Iowa—moved to expand. By 2017 surveys showed a strong majority of Kansans favoring expansion. That sentiment played out legislatively last spring when a bipartisan majority of Kansas lawmakers voted to accept the federal funds, but Brownback quickly put his veto pen to the measure, and an override attempt fell just a few votes short in the Kansas House.

As Brownback issued his veto, he likely thought Medicaid expansion was about to die anyway along with Obamacare. President Trump and a Republican Congress had put Obamacare repeal on the front burner nationally. Yet “Repeal and Replace” and the starker “Repeal and Replace Later” have failed time and again, in large part because of the blow that would be delivered to Medicaid.

Medicaid expansion has proved to be an effective (and popular) way to reduce the number of Americans without health insurance. The Congressional Budget Office estimated that as many as 32 million Americans would lose health insurance as a result of repeal and replace legislation. Republican governors of expansion states opposed repeal. Kansas’ own Sen. Moran played a key role in keeping the possibility of Medicaid expansion alive for Kansas, after many of his constituents let him know how they felt.

So now Medicaid expansion appears here to stay, and our years of refusal seem more financially inept than ever. Kansans who could have had health care have been left without or shunted to emergency rooms, a moral stain on the Brownback administration and on Kansas.

In June the Kansas Legislature took an important step toward fixing the Kansas budget by rescinding Brownback’s tax policies. Expanding Medicaid eligibility should be the next step toward freeing Kansas from the troubles of the Brownback years, and that vote should occur immediately when the Legislature reconvenes in January.

Stop the ticker, lawmakers.

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

Friday, July 28, 2017

The Tall Tale Being Told In Kansas

The recently overturned Kansas tax experiment was sold to Kansans with a tall tale: “Big income tax cuts bring economic prosperity without any pain.” Eventually most Kansans realized the story was false, and their legislators ended the experiment this year with a bipartisan veto override.

Then, very quickly, a new story began to circulate: “The tax experiment failed because Kansas spends too much.”

Legislators on the losing side of the override vote made speeches claiming Kansas had a spending problem, not a revenue problem. Sam Brownback denounced “excessive spending” even as he signed the newly passed state budget. Tax cut apologists at places like the American Legislative Exchange Council began arguing that tax cuts work, it’s just that in Kansas spending was not reduced enough to match revenue losses. And just days after the override vote, Kris Kobach entered the governor’s race, blasting the vote as an effort to “feed” state government spending.

It’s easy to discern that the too-much-spending rhetoric is the old tall tale morphed into a new form. 

Here’s the test: If the talk was credible, the talkers would be able to provide a coherent list of spending to be cut from the state budget. But they don’t. Brownback could have issued line-item vetoes to knock out the spending he considered excessive. But he didn’t.

If Kansas spends too much, what should be cut? Name it. Education? Highways? Health services?

Realistic spending cuts are produced by getting rid of inefficiencies, or finding less expensive alternatives to current practices, or convincing constituents that something does not need to be done anymore. That happens through the grind of the annual budget process, through vigorous and detailed debate. It can be hard, tedious work, far different from just declaring that spending is too high.

In the just completed legislative session, lawmakers created a reasonable budget. The process was open. They grappled with the recommendations from an efficiency study and seriously worked to address the school finance court case. The result they produced was not lavish. Many needs were left unmet. Even so, revenue had fallen so low as a result of the Brownback tax cuts that Kansas was almost $1 billion short of meeting expenses. Lawmakers had no choice but to end the tax experiment.

Expenses in the Kansas budget almost entirely go to education, human services, highways, and public safety. No easy cuts there. Citizens want and expect those services. Certainly lawmakers should always be on the lookout for ways to keep spending as low as possible, but future expenses are far more likely to go up than to go down as lawmakers work to get school funding back to an adequate level and undo the damage from raiding the highway fund.

Kansas has a good deal of work ahead to regain financial stability—but excessive spending isn’t one of the problems requiring a solution.

Those complaining of overspending in our state who cannot offer specific places that could be cut would lead the state nowhere. They tell a tall tale.

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

Friday, June 30, 2017

Kansas Turnaround

Kansans, we are done being kicked around. For five years we endured the eyes of the nation upon us, judging Gov. Brownbacks tax experiment. We became famous: the poster state for bad tax policy. The takeaway message from those watching was “Don’t do what Kansas did.”

But our narrative has just changed. Earlier this month, a bipartisan supermajority of Kansas legislators overrode a governor’s veto, effectively ending the experiment. Now the headlines trend toward a more positive, akin to “Kansas shows the way out” theme, or “Kansas provides a lesson to the country.”

Indeed, Kansas does show the way out. The experiment ended because a wide swath of Kansans become thoroughly engaged and said, “Enough.”

Kansans wanted their government to work, and wanted public education adequately funded. A practical approach to state finances and a sense of fairness about who should pay taxes triumphed over a discredited “trickle down” tax cut ideology. Gov. Brownback never repented of the financial mistake that defines his governorship, but finally most Kansans could see that his “sun is shining in Kansas” mantra was false.

Certainly, kudos should go to the courageous legislators and legislative leaders who voted to override. Ultimately, though, the real deciders on this issue were Kansans themselves. An override vote that raised taxes and repudiated a governor’s policy agenda could not have happened without strong consent from the populace.

Most citizens prefer not to spend their time thinking about budget and tax policy issues. But by the summer of 2016, an overwhelming number of Kansans had tuned in to those issues. They did not like what they saw and definitively expressed themselves in the August primary and November general elections.

The 2017 legislative session began with one-third of the seats held by new lawmakers. Polling done mid-session showed that two-thirds of Kansas voters disapproved of the Brownback tax plan. That disapproval tracked across all political ideologies. An even higher percentage of voters expressed concern that the state was not investing enough in education. With those lopsided polling numbers, the die was cast for the override. Kansans had decided.

Kansas will be climbing out of the Brownback experiment for years. The override vote did not fix all problems, but at least everyone can take a breath. Our political energy can now focus on the future rather than on crisis management. Our red state status is likely still intact, but the roots of a practical and fair-minded Kansas have started to show through again.

Finally, a word to the rest of the nation: We Kansans are “mopping up our mess,” as Senate Majority Leader Denning put it. We’re turning around. Maybe many of you in other states thought we went nuts with our experiment, but keep any smug feelings in check. The whole nation could so easily go down the same rat hole. The Trump tax plan looms. It’s the Kansas experiment on steroids. Pay attention now, or we will all be mopping up something much bigger.

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

Friday, June 2, 2017

A Yes Vote on the Trump Tax Plan Betrays Kansas

An open letter to the Kansas congressional delegation:

Dear Representatives Marshall, Jenkins, Yoder, and Estes, and Senators Roberts and Moran,

A moment of truth for each of you is at hand. President Trump has proposed a tax plan that looks and sounds remarkably like the Brownback experiment now playing out in Kansas. Trump will be asking for your vote — but please consider the experience of your home state before you cast it.

Just like the Brownback tax cuts, the Trump plan makes dramatic changes to tax policy by consolidating income tax rates and reworking deductions. But most notably, the Trump plan offers an enormous tax break to individuals who receive “business pass through income.” In Kansas this feature has become known derogatorily as the LLC loophole, allowing business income to be sheltered from income tax while people who earn a paycheck must pay tax.

Given that the same economists who advised Brownback now advise Trump, it’s unsurprising that the Trump administration uses similar arguments to sell its plan: the tax cuts will grow the economy and create millions of jobs; the tax cuts will pay for themselves; everyone will benefit. Brownback said all that, too.

But after five years of the Brownback experiment in Kansas, we know the real result. Kansas has an anemic economy and one of the lowest rates of job growth in the nation. A dramatic drop in revenue broke the state budget, wiped out reserves, significantly boosted state debt, and put public education at risk. And that part about everyone benefitting—well, it turns out that the bulk of the tax cut benefits went to the wealthiest Kansans while the tax bill to low-income Kansans actually went up.

The idea that tax cuts will “pay for themselves” or that tax cuts for the wealthy will “trickle down” to the middle class should be added to the list of discredited ideas that sound good but don’t work. The sell job at the beginning was oh-so-seductive, but Kansans now have the raw experience to grasp that the experiment carried out on us was a complete failure.

Do you understand how hard Kansas legislators must labor now to fix the financial disaster? Are you catching on that general fund revenue has fallen $1 billion below expenses? Can you see how all political energy goes into crisis management rather than building our future? Is that what you want for the entire country?

Based on your public statements so far, it’s hard to feel confident that any of you will acknowledge the tax policy failure in Kansas and fight off the Trump plan. If you support it, you betray all who have endured the troubles resulting from the Brownback plan, and the Kansas legislators who have been struggling in overtime this legislative session to reverse course. And a yes vote would be a willful betrayal, because after everything that has happened in Kansas, you will never be able to say “I didn’t know.”

Duane Goossen

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

Tuesday, May 9, 2017

The Gaping Kansas Budget Gap

As the Kansas Legislature begins a “wrap-up” session, how big is the budget gap that must be closed in order to adequately fund schools and repair the state’s dismal financial situation?

Recent revisions to the general fund revenue forecast predict tax collections to be about $50 million a year higher than previously expected. That’s helpful, but Kansas still faces a huge structural budget imbalance without any reserves to draw on.

Following the release of the revenue estimate, media reports pegged the budget gap at $900 million over two years ($450 million annually). However, that calculation did not add anything to cover new spending for school finance, and assumes that $300 million will still be taken each year from the highway fund.

Look closely at each fiscal year:

FY 2017 (July 1, 2016 to June 30, 2017). Apply the new revenue forecast to the almost completed FY 2017. Recurring revenue** calculates to roughly $5.7 billion. But the budget for FY 2017 that lawmakers approved spends about $6.3 billion, $600 million above recurring revenue. To close that gap, lawmakers diverted $300 million from the highway fund to the general fund. And they authorized loans to borrow another $300 million, with a portion of the borrowed money to be repaid over the next 6 years, and a portion over 20 years. Also, $80 million of unpaid FY 2016 school bills that were shifted forward to be paid in FY 2017, will be shifted forward again. None of the FY 2017 “gap fillers” actually fix the state’s financial problems. In fact, they make financial problems even worse in future fiscal years.

FY 2018 (July 1, 2017 to June 30, 2018). Now consider FY 2018, the key fiscal year for which lawmakers must create a budget. Using the revised revenue estimate, recurring revenue again stands close to $5.7 billion. Lawmakers have not yet finalized spending for FY 2018, but both the House and Senate are headed toward a budget that spends more than $6.4 billion once required payments to KPERS are factored in. However, that $6.4 billion figure does not yet address the increased spending needed to fix school finance. The leading school finance bill under discussion adds $150 million to expenses each year for 5 years, eventually appropriating $750 million more for schools annually. Adding the first $150 million installment for school finance puts likely FY 2018 expenses almost $900 million above revenue.

FY 2019 (July 1, 2018 to June 30, 2019). In FY 2019 “recurring revenue” calculates a bit higher, between $5.7 and $5.8 billion, but expenses will be higher too. Add the second-year $150 million school finance installment, and the FY 2019 structural gap goes over $900 million.

To structurally balance the budget and meet education obligations, Kansas needs a revenue reform package that produces at least $900 million annually. Without a realistic solution, Kansas will continue to drain its highway fund, borrow, become poorer, and put the public education system at risk.

The 2012 income tax cuts are the root cause of these crippling financial problems in Kansas. Rolling back the Brownback tax plan remains the simplest and best solution.

** Recurring revenue is essentially the net income that can be counted on each year to pay for general fund expenses. Here’s a simple calculation of recurring revenue for FY 2017: Kansas expects tax revenue of $5.746 billion. From that, subtract $180 million for the state’s share of school construction bonds. (Though this cost should be shown as an “expense,” it is instead counted as a “transfer” or “reduction to revenue.”) Then add in interest income of $64 million, and agency earnings of $77 million. That very roughly brings FY 2017 recurring revenue to $5.7 billion.

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

Tuesday, April 18, 2017

Free Kansas

Kansas is thrashing in Governor Brownback’s grip. Tax reform to restore desperately needed financial stability? Vetoed. Medicaid expansion? Vetoed. A fair and adequate school finance formula? That bill has not yet arrived at the governor’s desk, but the prospect of a signature doesn’t look good.

The governor’s vetoes strike right at the heart of practical, fair-minded, fiscally conservative, give-a-hand-to-your-neighbors Kansas.

Deep down, Kansans know the state must bring in enough revenue to pay for necessary services. It’s basic fiscal responsibility. But, as recent polling shows, Kansans have figured out it’s not happening in the state budget, and a large majority want that changed. Education, highways, and Kansas’ future depend on sound finances. The vetoed tax reform bill that would have ended the Brownback “experiment” was passed with strong bipartisan support (40 Republicans and 36 Democrats in the House, 14 Republicans and 8 Democrats in the Senate).

Medicaid expansion offers health coverage to tens of thousands of uninsured Kansans, and is firmly pro-business by helping hospitals stay in operation. Kansans want to help their neighbors in this way. 82 percent favor expansion! Just like the tax reform bill, large bipartisan majorities in the House (41 Republicans, 40 Democrats) and Senate (16 Republicans and 9 Democrats) sent the Medicaid expansion bill to the governor.

The state is under court order to fix school finance by June 30. Schools stand as the backbone of many Kansas communities. Again, polling shows a large majority of Kansans in support of public education, and very wary of putting schools at risk with inadequate resources.

Brownback held Kansas back with his vetoes, but not singlehandedly. Legislators tried to achieve a two-thirds majority to override, but each time missed by just a few votes. The difference between override success and failure? Legislative leaders. President Wagle, Majority Leader Denning, and Speaker Ryckman voted with Brownback, and they are still trying to negotiate with him on these issues despite the fact that super majorities in their respective legislative chambers, and most Kansans, are not with them.

Negotiating with Brownback on tax reform can only lead to a very weak outcome, one that still leaves Kansas broke, borrowing, postponing bill payment, and diverting highway dollars. The governor’s only answer on Medicaid expansion appears to be “no.” On school finance, lawmakers are heading toward an updated version of the school finance formula that Brownback scuttled in favor of unconstitutional and inadequate block grants.

When legislators return from break on May 1, Kansas needs meaningful action. Legislative leaders have to quit Brownback, and move the state forward. Bypassing the governor may be hard for them, and out of the norm for Kansas politics, but that’s what the situation requires, and it’s what Kansans want.

Please, leaders and legislators, don’t make Kansas wallow in financial stress for another year. Don’t cut out the Kansans who need health care. Don’t risk having schools closed in August. Unclasp us from Brownback’s grip. He’s not the one who will be standing for re-election. He’s not the future. Override. Free Kansas.

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

Tuesday, March 21, 2017

Name Your Budget Cuts

Kansas budget cutters: the time has come to get real and very specific. Which expenses can be cut to balance the state budget? What’s your plan? Put out the details so that Kansans can judge the best course of action.

Despite multiple rounds of budget cuts over the last years, some legislators and groups like the Kansas Chamber of Commerce and Americans for Prosperity have continued to make vague, abstract pronouncements that Kansas has a spending problem. They suggest that financial trouble in Kansas can be solved by getting rid of “inefficiencies.”

That kind of talk nurtures a popular stereotype of government, but does it at all ring true in Kansas anymore? If true, those saying such things should have no trouble naming the spending that needs to be eliminated. Surely, with the financial health of Kansas on the line, would-be budget cutters can muster specificity.

In the wake of a new court ruling, what part of school funding can be cut? Saying “put students first” is not an adequate answer though.

How about chopping Medicaid? Doctors, hospitals, and nursing homes providing services had their Medicaid reimbursement rates cut 4 percent this year. Can that cut be made deeper?

Vast amounts of money have been lifted from the highway fund, causing many road projects to be cancelled. Should Kansas spend even less on highway maintenance and bridge repair?

State employees have not had a raise in 9 years. How about making it 10? Or maybe cutting their health benefits can save money.

Without specifics, claims of an inefficient, overspending state government come up empty and lead nowhere.

When explaining his recent veto of a revenue-raising bill, Gov. Brownback chided lawmakers for not considering more expense cuts, but his own budget does not show the way. His main proposal to reduce spending shorts the required payments into the already precarious public employee retirement fund. That’s like a homeowner skipping mortgage payments. It doesn’t actually eliminate the expense, just piles it onto the obligations in future years.

Kansas faces a festering budget gap between income and expense that now exceeds a billion dollars. Only two approaches can effectively solve the problem: cut expenses—in a real way—or raise revenue. Lawmakers have not done enough of either to cure the structural imbalance in the budget.

Instead, they have resorted to short-term patches that kill Kansas financially—blowing through the reserves, borrowing, putting off bill payments, raiding the highway fund, trying to sell assets. With each of these maneuvers, Kansas has become poorer, but without fixing the problem. These misguided efforts have to stop.

If there was ever a time for serious budget cutters to shine, this is it. Put your proposals out on the table and explain them. But if you are only able to talk in generalities, don’t waste everyone’s time. Either offer credible ways to reduce expenses, or let the Legislature proceed to rollback the 2012 income tax cuts.

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

Friday, March 10, 2017

Open Letter to Kansas Lawmakers: Evacuate from Fiscal Hell

Last week’s Supreme Court ruling requiring increased funding for Kansas schools did not surprise many people, but it still complicated an already challenging legislative session.

So, now what?

Here are three observations from a budgetary perspective:
  1. The goal post moved…a lot. Lawmakers must adjust accordingly. House Bill 2178 was a good first attempt at fixing our broken tax code, making needed structural reforms to stop future revenue hemorrhaging. But it only generated $460 million annually — far short of closing the $900 million structural shortfall created by Governor Brownback’s tax policy. Many still supported it (myself included) because a school finance ruling was likely to offer a later opportunity to finish the job. Now that the school finance ruling is upon us, lawmakers must restore $500-$800 million to schools in addition to filling the $900 million structural shortfall. House Bill 2178 generates far too little revenue to still be considered a responsible solution.
  2. Comprehensive tax reform should still come before any budget action. Many reports continue to characterize the gap as $350 million in 2017 and then $580 million in 2018. That’s only accurate if lawmakers raise $350 million in recurring revenue this year or make another $350 million in cuts. There hasn’t been much appetite for either of those options. It seems more likely the Legislature will borrow its way out of 2017 instead, as proposed in House Bill 2052 (the House rescission bill). If that happens, Kansas will face a $932 million gap in 2018. Just look at the basic numbers: the 2018 revenue estimate is $5.536 billion. Meanwhile, delivering the current level of services in 2018 is projected to cost $6.468 billion. Bear in mind that figure does not account for any payback for a Fiscal Year 2017 loan. Nor does it include any additional investment necessary to comply with the court’s order. There is simply no way to proceed without first stabilizing the revenue stream.
  3. Ten hundred million one way, one billion the other. Absent hundreds of millions more in budget cuts, Kansas faces a minimum structural gap of $1.4 billion. Billion. With a “B.” A tax reform package that fails to close this minimum gap guarantees yet another devastating shortfall next year – even if a school finance formula is phased in over time. Is that really how we want to spend 2018? This is the moment to end the crisis in its entirety.
Governor Brownback’s tax experiment dumped Kansas into a fiscal hell. Now even he reportedly seeks an emergency evacuation plan. Except – assuming it’s true – the Governor’s plan would only save himself. Kansas is on its own.

If even Governor Brownback can’t summon the courage to stay and fight for his failed tax experiment, why should any lawmaker defend it – or preserve any part of it – at the expense of Kansas schools and communities?

These are jaw-dropping figures, leaving no good options. Legislators deserve our thanks for not jumping ship and for demonstrating courage to put Kansas back on a practical path forward. Please keep going. It won’t be easy, but please do not stop short of ending this experiment once and for all.

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

Thursday, February 9, 2017

Repeal the Loophole, and More

The LLC loophole has come to epitomize budget-busting tax policy in Kansas. It appears that a majority in the new Kansas Legislature know the loophole must be repealed, and fully intend to end it. But if viewing the situation with clear-eyed honesty, those legislators also know that loophole repeal corrects only a fraction of the problem. To fix Kansas financially, lawmakers must produce a more comprehensive solution.

The loophole, put in place in 2012 as part of the Brownback tax experiment, set up a highly unfair tax situation. Individual Kansans who receive income through a limited liability corporation (LLC), self-employment, a farm, or rental property pay no Kansas income tax. But people who receive a pay check, do owe tax. An owner pays no tax on personal income taken from a business, yet employees of the business pay taxes.

Exempting such a large swath of income from tax has obviously lowered receipts and contributed to financial woes in Kansas, but with little economic payoff. The promise of explosive job growth failed to pan out, maybe because creating a job was never required as a condition of receiving the tax cut. Since the loophole opened, Kansas job creation has been anemic, running far behind our region and the U.S. as a whole.

The loophole has to go. No other state does tax policy this way.

While most Kansans have figured this out, they may not realize that just killing the loophole still leaves Kansas in deep financial trouble. Thanks to the 2012 tax changes, Kansas does not have nearly enough income to pay bills. The loophole caused about one-third of the revenue loss. Income tax rate reductions, which especially benefit the wealthiest Kansans, caused the rest.

The current dire Kansas financial situation will not cure itself; nor will one-time tricks and maneuvers work. Lawmakers need a comprehensive solution that raises enough recurring revenue to meet expenses. “Comprehensive” does not necessarily mean a complete return to pre-2012 tax law, but lawmakers at least need to consider moving the upper income tax rate back where it once was, in addition to closing the loophole. If money continues to be siphoned from the highway fund, a higher gas tax could allow a reasonable level of road maintenance.

The governor’s proposals are of little help: borrow, sell assets, renege on retirement funding, and grab even more from highways. Legislators have to produce the real solution on their own. Strategically, legislators may even need to vote against a stand-alone loophole repeal in order to force a vote on a broader revenue package. A piecemeal approach in which lawmakers cast individual votes on each potential revenue change will likely doom a comprehensive solution.

Irresponsible decisions made five years ago have left a huge mess in Kansas today. Our situation was a lot easier to get into than to unwind. Clean-up requires realistic assessment, courageous votes, and comprehensive tax reform. Anything less leaves Kansas in the same downward spiral.

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

Friday, February 3, 2017

January Revenue In Perspective

January general fund tax revenue turned out to be a bit “higher than estimated.” Good. That’s certainly a better situation than if monthly revenue were lower than estimated, as has been the case so many times over the last four years.

However, the January result does not alter the grim financial situation facing Kansas. Nor does it indicate that Kansas is now on some new financial trajectory.

The key words to consider are “higher than estimated.”

Remember, last November Kansas officials made revisions that dramatically lowered the estimate of FY 2017 revenue. The target was set so low that Kansas now expects to receive less tax revenue in FY 2017 than in FY 2016, and far, far less than in FY 2013, the year before income tax cuts fully kicked in. Beating the revenue estimate in January is not exactly a high bar.

In FY 2014, general fund tax revenue fell $700 million when income tax rate reductions and the LLC loophole were implemented. Receipts never recovered, staying at that lowered level in succeeding years.

Think about it this way: Even if revenue collections meet the “estimate,” Kansas has an almost $700 million structural budget gap in FY 2017. The official estimate forecasts recurring general fund revenue at $5.6 billion, against expenses of nearly $6.4 billion. A portion of that gap has already been closed by transferring hundreds of millions from the highway fund and other funds, but lawmakers still have around $350 million to go. The Legislative Research Dept. projects that the gap between revenue and expenses in FY 2018 will grow to around $900 million.

Through the month of January, FY 2017 general fund tax revenue is $32 million higher than officially expected, but $11 million lower than the same period of the last fiscal year. The $32 million helps, but has essentially already been offset by a lower-than-expected amount from the sale of the Bioscience Authority and higher-than-planned-for Medicaid costs. If anything, the current gap between revenue and expense has grown, not diminished.

Kansas’ financial troubles remain very, very serious. The financial wound inflicted by unaffordable income tax cuts will not heal on its own or through accounting tricks and one-time maneuvers. The amount of recurring revenue must be raised back up in order to reasonably meet expenses.

Kansas lawmakers have to face the hard fact that they need a comprehensive revenue reform package to bring structural balance back to the Kansas budget.

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

Sunday, January 29, 2017

Governor’s Budget: Don’t Look Here for Structural Balance

The governor claimed he was producing a structurally balanced budget.  The lieutenant governor predicted that a structurally balanced budget was coming.  And after its unveiling, the governor’s staff asserted the budget was indeed structurally balanced.

But it’s not.  Not even close.  Unfounded claims and assertions can’t make it so.

“Balancing recurring revenue with recurring expenditures is the foundation of a structurally balanced budget ... A truly structurally balanced budget is one that supports financial health for multiple years into the future.”  A&M KansasStatewide Efficiency Study, 2016

Kansas faces a giant gap between recurring revenue and recurring expenses, a gap that opened up immediately when revenue dropped sharply upon implementation of the 2012 income tax cuts.  Subsequently, the FY 2014, FY 2015, FY 2016, and FY 2017 budgets have all been structurally unbalanced, the general fund kept barely solvent by using up reserves, grabbing money from the other funds, borrowing, and one-time tricks.  In each of those years, Kansas became poorer—bank accounts depleted, debt way up, credit rating down.

The governor’s revised FY 2017 budget and newly proposed FY 2018/FY 2019 budget brings more of the same!

FY 2017 (July 1, 2016 to June 30, 2017).  In this half-completed fiscal year, the general fund is $350 million short of being able to meet expenses, even though hundreds of millions have already been transferred from the highway fund, and deep emergency budget cuts applied to higher education and Medicaid providers.   The governor’s budget recommends two main things to address the $350 million shortfall:
  • Borrow.  The governor proposes to borrow $317 million to be paid back over 7 years.  If the Legislature agrees, that would increase expenses over the next 7 years, widening the structural imbalance.
  • Don’t pay bills.  In order to stay financially afloat in FY 2016, the state simply did not pay $87 million worth of bills, including $75 million owed to school districts.  The bills were carried over to FY 2017 to be paid as soon as money was available.  The governor now recommends not paying those bills at all.  (A $96 million KPERS bill also went unpaid in FY 2016, with a promise that it would be paid with interest in FY 2018.  The governor also now recommends not paying that.)

FY 2018/FY 2019.The Legislative Research Dept. calculates the gap between revenue and expenses at about $900 million per year.  The governor’s recommendations to close the gap can essentially be distilled down to four main financial moves:
  1. Sell the tobacco settlement revenue stream.  “Securitization” would sell the next 30 years of tobacco settlement payments (which currently pay for early childhood programs) for a lump sum to prop up the general fund in the short term.  It’s the same concept as a payday loan.
  2. Gut the highway fund.  Between directly transferring money to the general fund and sending general fund bills to the highway fund for payment, more than $500 million of highway fund resources would be diverted to the general fund each year. Administration officials claim this would not harm highways, but that’s as believable as the claim that the budget is structurally balanced.
  3. Don’t make required KPERS payments.  Kansas law sets out a clearly defined schedule of payments into the state retirement system. The governor’s budget proposes paying almost $600 million less than required over the next two years.  Defaulting on these payments doesn’t reduce the state obligation, just pushes it off to future years.
  4. Tax increases.  The governor wants to raise about $180 million per year with a package of tax hikes that include doubling the taxes Kansans pay when they make purchases at liquor stores, and adding $1.00 to the per-pack tax on cigarettes.
Except for the proposed tax increases, none of these recommendations move Kansas toward structural balance by upping recurring revenue or lowering recurring expenditures.  And even if all components of the governor’s tax recommendation would pass, at best the revenue raised only closes about 20 percent of the structural gap. 

The governor’s budget appears designed to avoid the obvious.  The income tax cuts that broke the Kansas budget must be revisited and a comprehensive tax reform plan put in place.   That’s the only realistic way to regain structural balance without severely damaging education, key services, and the state’s infrastructure.   

The proposed budget from the governor does not open a path to a stable financial future.  It’s a recipe for yet another credit downgrade.  Legislators will serve the state best by disregarding much of it and starting fresh.

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

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.

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