Friday, May 26, 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.”

Sincerely,
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.

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