TOPEKA – The state will need either a big economic boost or some serious cuts to government in order accommodate the income tax cuts Gov. Sam Brownback and state lawmakers approved earlier this year, according to estimates released Tuesday.
The consensus revenue estimates show the state will have to make up for a $327 million projected shortfall in its 2014 fiscal year.
That’s assuming the state spends down all of its reserves, keeps base state aid to students steady and allows a 6/10ths of a cent sales tax to expire on time in July 2013. It also assumes that the state doesn’t get a boost in revenues as a result of the income tax cuts.
Brownback’s budget director, Steve Anderson, officials with the nonpartisan Legislative Research Department and three university economists agreed on the new projections after hours of discussion Tuesday.
The estimates come as state agencies have been asked to show how they would handle a 10 percent cut in funding.
But Anderson said the 10 percent cut scenario isn’t tied to the tax cuts. He said it is instead a way to prepare for potential economic problems caused by unease in the Mideast, economic problems in Europe or unforeseen disasters.
Anderson said that he doesn’t expect the state to cut 10 percent; 5 percent would be closer. He declined to provide details of the budget he is working on with the Governor, but he said Brownback will keep K-12 education “fully funded” and keep “all essential services.”
“We’ll be in far better shape than most think,” he said.
But Democrats saw the figures as a confirmation that Brownback has put Kansas “on the path to bankruptcy.”
In a news release, House Minority Leader Paul Davis, D-Lawrence, said the budget problems the state faces now are different than those of the past.
The outlook is similar to what researchers projected after Brownback signed the income tax-cutting bill earlier this year.
The income tax cuts, which go into effect Jan. 1, eliminate nonwage income tax for more than 190,000 businesses, including limited liability corporations, subchapter S corporations and many farms. The cuts also drop the top rate for individual income taxpayers from 6.45 percent to 4.9 percent and reduce the lowest rate from 3.5 percent to 3 percent.
The Legislature approved the income tax cuts through a series of political maneuvers after the Senate, controlled by moderate Republicans, balked at Brownback’s proposal and a negotiated compromise because they said the cuts would force the state into an artificial budget crisis.
Even some lawmakers who voted for the tax cuts voiced reservations. But they said the state needs tax reform to spur the economy and stay competitive with surrounding states; they forwarded a heavily altered version of the income tax cuts Brownback proposed.
The bill Brownback signed was significantly more expensive than his original proposal because it retained some popular income tax credits and deductions.
The Kansas Legislative Research Department initially estimated the cuts would leave the state with $4.5 billion less in revenue over six years, causing a budget deficit of $2.5 billion by 2018. Since the state can’t run deficits, it would have to cut spending to afford the tax cuts.
The new figures also reflect better projections for the state’s housing market as the state slowly grows out of the recession.
“The group (of economists) does believe we do have a somewhat rebounding housing market and some indication of stronger consumer confidence,” said Raney Gilliland, director of legislative research. “However that growth remains slow, not just for the U.S. but, in addition, for Kansas.”
The revenue estimate shows lower expectations for the state’s oil and gas production as well as economic problems stemming from this year’s drought.
Shortages in water and strong oil activity just south of Kansas’ border in Oklahoma have sapped the state’s oil and gas play, Gilliland and Anderson said.
Anderson said that despite those factors and the projected impact of tax cuts, he’s confident things will be OK.
“We’re basically still on course,” he said.