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Tax increases and spending cuts How the fiscal cliff could affect Kansans

  • Eagle Washington bureau
  • Published Sunday, Dec. 9, 2012, at 2:20 p.m.
  • Updated Sunday, Dec. 9, 2012, at 2:35 p.m.

Pompeo on the fiscal cliff

Rep. Mike Pompeo, R-Wichita, said the country needs “major financial restructuring” — not an increase in the debt ceiling.

He said Thursday that it would be unlikely he’d support a budget agreement that would raises taxes on higher income brackets while promising to cut entitlement spending.

"Could I vote for it if there was a firm commitment? The devil is in the details," he said. "My view of history is those cuts never happen.

"It’s unlikely that I’ll end voting for something that has spending cuts in the future and raises taxes immediately. You’d have to convince me."

— If the mixture of spending cuts and tax increases known as the fiscal cliff kicks in just after New Year’s Day, Kansas doctors would scramble to replace lost income, researchers would worry about dwindling grants and residents statewide would see more taxes drained from their paychecks.

Beyond that, though, state officials and budget watchers in Washington are uncertain how spending cuts would specifically affect Kansas.

“There’s not a real way to anticipate or estimate in any accurate way how the cuts will fall,” said Shai Akabas, senior policy analyst at the Bipartisan Policy Center, a Washington think tank.

While the budget cuts known as the sequester would be significant and spread around the country, federal officials have some flexibility in how they are actually put into place.

When there was a sequester in the 1980s, Akabas said, chaos ruled the day. As what was then known as the General Accounting Office said at the time: “We found widespread confusion among agencies in applying the program, project and activity definitions.”

But what is known has officials dependent on federal funds worried enough – and the uncertainty only makes it tougher.

The fiscal cliff is a series of federal tax increases and spending cuts that will automatically take effect in January. They are automatic because of moves Congress made in years past, in part to push back any decision on the nation’s deficit.

Now, the drop-dead date Congress wrote into law is a few weeks away, and unless lawmakers and President Obama can agree on an alternative proposal, this set of cuts and tax changes will go into effect.

Tax increases

Overall, it would mean about $400 billion in tax increases, along with about $100 billion in spending reductions, according to the Pew Center on the States, a nonprofit research organization. Economists fear that might raise the unemployment rate to 9 percent or higher and push the nation back into a recession.

“The first place Kansans will feel it is in their pocketbook – payroll taxes will go up, dividend taxes will go up,” said Rep. Mike Pompeo, R-Wichita. “We’ll have real Kansans – hard-working middle-class Kansans – hurting.”

Several different taxes will be affected, including the 2001 and 2003 tax cuts, and the recent reduction in the payroll taxes. All are set to expire.

Because of the way the federal tax code is intertwined with state tax codes, an increase in federal tax revenue can mean an increase in state taxes. In Kansas, personal and corporate taxes are tied to federal tax deductions or credits, which could mean an increase in state tax revenue, according to the Pew Center.

However, the staff of Gov. Sam Brownback is not preparing for the possibility of an increase in state tax revenue because of federal tax policy changes.

“We believe lawmakers in Washington will come to an agreement to avoid the effects of the so-called fiscal cliff,” said Sherriene Jones-Sontag, Brownback’s press secretary.

Even so, the governor and his Cabinet secretaries are assessing the impact of a reduction in federal funding and are preparing contingency plans should federal funding be reduced or delayed.

“Kansas will continue to provide the state’s essential services,” Jones-Sontag said.

Budget cuts

The fiscal cliff cuts will come in the form of automatic budget cuts, which have a direct impact on state budgets; expiration of federal unemployment insurance; and expiration of what’s known as the Medicare “doc fix,” which would dramatically reduce payments to physicians.

Federal Funds Information for States, a Washington-based research organization, said the law requires that the automatic budget cuts totaling more than $100 billion must be divided between defense and non-defense spending, and then between mandatory and non-mandatory programs.

In Kansas, the organization estimates that non-defense federal spending would drop by $61.8 million from fiscal 2012 to fiscal 2013. That’s about a 7 percent cut in the federal grants tracked by the group that are subject to the automatic cuts.

When looking at all federal grants to Kansas – those subject to the cuts and those not – federal spending to the state would be basically flat, in part because of continued growth in entitlement programs such as Medicaid.

At the University of Kansas, officials are worried about what could be a significant drop in funding from the National Institutes of Health, the nation’s premiere biomedical research organization. It funnels much of its money to universities and medical schools.

In fiscal 2012, NIH funding tracked to specific states totaled about $22 billion, according to the federal funds research group. That could drop about 8 percent – $1.7 billion – if the automatic spending cuts kick in.

It would be acutely felt at KU, which in fiscal 2011 received $109 million in NIH funding; if the spending cuts kick it, that would drop about 8 percent, or about $9.1 million. Another $9 million would be lost in funding from other federal scientific or agricultural agencies, according to the university.

“I’m optimistic that they are going to get to a deal,” said Timothy Caboni, the university’s vice chancellor for public affairs. “The danger is that it really does put at jeopardy our innovation and discovery. And it’s not just the institution at risk. It puts the regional economy at risk.”

Individual doctors across the state also will be scrambling come January because of a separate measure called the Medicare “doc fix.”

Each year, Congress acts to prevent dramatic reductions in Medicare fees paid to doctors that would otherwise kick in automatically.

If Congress doesn’t make changes, Medicare rates would drop by 27 percent next year. Right now, about 450,000 Kansas residents use Medicare, said Jerry Slaughter, executive director of the Kansas Medical Society.

“An awful lot of physicians would out of necessity have to re-evaluate how many Medicare patients they can absorb into their practices,” Slaughter said.

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