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Monday, July 28, 2014

Estimate: Tax cuts could mean $910 million deficit for Kansas

BY BRENT D. WISTROM
Eagle Topeka bureau

The state could face a $910 million budget deficit when a proposed income and property tax reduction plan goes into full effect in 2018, according to a draft estimate obtained by The Eagle.

That price tag could complicate ongoing debates in the Statehouse about cutting taxes as the wrap-up session enters its final two weeks. Already, Senate Majority Leader Jay Emler, R-Lindsborg, has said negative ending balances could be a deal-breaker in the Senate, where an earlier version of a tax cut plan was defeated last month only to be reconsidered after Gov. Sam Brownback’s administration pressured lawmakers to advance it to keep the tax cut discussion alive.

The tentative tax-cut agreement includes phasing out nonwage income taxes for limited liability companies, which can include small retailers and large businesses. The proposal also collapses the state’s three individual income tax brackets to two and lowers rates to 3 percent for married couples filing jointly with incomes less than $30,000 a year and 4.9 percent for those who make more. It would channel $45 million a year to local governments for property tax relief.

The draft estimates produced by the Legislative Research Department take into account tentative budget proposals, updated figures from Brownback’s administration and new estimates of spending for social services.

But Rep. Marvin Kleeb, R-Overland Park, said legislative researchers are trying to reconcile the new estimates with numbers from the Department of Revenue, which projected enough growth in state receipts to pay for income tax cuts. Kleeb declined to comment further until the projections are fully vetted.

The estimates

Draft estimates show the cost of the proposed tax cuts at $153 million in the 2013 fiscal year, when the plan would be in effect for half a year. The number climbs to $495 million in the 2014 fiscal year and then grows as business taxes are phased out, reaching $676 million in 2018, the first full year when nonwage income taxes would be exempt for limited liability companies, subchapter S corporations and sole proprietorships.

Neither of the estimates appears to account for businesses that may reorganize to take advantage of the tax breaks, a factor Democrats suggest could push the actual costs much higher.

And they do not consider any growth that may occur as businesses invest the money they save on taxes into expansions or as new businesses come to the state to take advantage of lower rates. That’s an aspect conservatives have said could ease the projected expenses as new businesses hire new people who contribute to state coffers through sales and property taxes.

Sen. Pat Apple, R-Louisburg, who’s on the tax conference committee, said he hadn’t seen the new projections, but had heard about them. The numbers could change depending on what the House and Senate ultimately agree on in their final budget. He said he hopes to see new projections reconciled with what Department of Revenue officials have shown.

The new estimates project a 10 percent ending balance in 2013. But that would dip to 2.7 percent in 2014 before dropping to negative 3.2 percent in 2015. The draft projections show an ending balance of negative 13.4 percent in 2018, when the plan is in full effect.

The projections show revenue to the state declining by about 12 percent between 2013 and 2018, apparently because of reduced income from proposed tax cuts and from the 0.6-cent sales tax set to expire in 2013. Meanwhile, figures show state spending increasing by more than 11 percent during that period.

Apple said he doesn’t have any specific number for what the state’s ending balance should be.

"We’d always like to have a 7.5 percent ending balance," he said. "But I’d probably be more concerned with our trend line."

For example, he said, if the ending balance is lower but appears to grow through the years, that may be acceptable. But if it looks healthy in early years and shows continued erosion longer term, it could be a problem.

Reconciling numbers

Rep. Richard Carlson, R-St. Marys, who’s on the tax negotiation team, said he hopes to see more positive numbers once researchers and Department of Revenue officials reconcile the differences between their projections.

He said he has no specific ending balance in mind. But he said he wants to be conservative and not force the governor to issue certificates of indebtedness. Generally, he said, he’d like to see ending balances of more than 3 percent; anything less could be problematic.

When Brownback proposed his tax cut plan in January, he focused on how it could jumpstart the state economy. But he also said the state needs healthy ending balances. His plan required a 7.5 percent ending balance before channeling any money toward further rate reductions.

Last Friday, Brownback said that he supports the plan House and Senate negotiators have tentatively agreed on. But it’s unclear whether he had seen updated cost estimates at that point. Prior estimates showed revenue growing fast enough to afford an earlier version of the plan.

Brownback said Friday that the state has made a huge turnaround — from a $500 million deficit when he took office to a $500 million surplus this year. He said that if revenues fall short of projections because of the national economy or some other hiccup in the state economy, he would look for more savings in the state budget. He noted voluntary retirements, office reorganizations and consolidation of computer systems as measures he has already taken.

Concerns over estimates

House and Senate negotiators reached a tentative agreement on the tax proposal last week, but they are waiting to sign off on the deal until they can review fiscal estimates and go over the details of the complicated plan. They plan to meet today.

The two Democrat negotiators have said they won’t sign the conference committee report, which would force the House and Senate to vote on whether they want to take action on the tax plan despite the lack of accord among negotiators. That could be seen as a test vote on the tax plan, and it would give lawmakers in each body the opportunity to essentially say whether they want to have a vote on the record about a tax cut during an election year.

Rep. Nile Dillmore, D-Wichita, one of the six tax bill negotiators, said he had not yet seen the draft impact numbers obtained by The Eagle. But he said they reflect a more realistic impact than numbers he has been publicly skeptical about in the past.

"For anybody who is concerned about keeping the state budget on an even keel that allows for core services, this would be a very frightening document," he said.

Dillmore noted that the projections don’t account for changes to social service caseloads in future years. The projected deficits could cause the state to cut more than $1 billion in spending between 2013 and 2018, a move that would come after about $1 billion in cuts in the past two years.

Dillmore said that education accounts for more than 60 percent of state spending, so it would be the most likely to take a significant hit as lawmakers look for ways to pay for the tax cuts.

"You can’t go out and quit buying paper clips to get to $910 million," he said.

Reach Brent Wistrom at 785-296-3006 or bwistrom@wichitaeagle.com.

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