The income tax increase Kansas legislators enacted over Gov. Sam Brownback’s veto won’t balance the budget by itself, despite immediately boosting the state’s credit outlook.
Even though the reversal of most of Brownback’s income tax cuts will inject $1.2 billion in new revenue through June 2019, lawmakers will have to continue relying on some of the same fiscal patches they’ve employed in recent years to keep the books balanced as state law requires.
“It’s going to take years to dig out of the hole,” said Sen. Laura Kelly, D-Topeka, who helped negotiate the final version of the budget legislation.
Part of the reason for the ongoing shortage is the spending increase for public schools that legislators approved last month to meet a state Supreme Court mandate. However, the state’s budget problems were deep enough that the GOP-controlled Legislature couldn’t raise taxes – or cut spending – enough to fix all of them at once and still get the supermajorities needed to override Brownback’s veto.
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“In essence, they’ve converted a super-large project into a medium-sized or small problem,” said John Hicks, executive director of the National Association of State Budget Officers. “Things are rarely done or completely resolved in one action.”
Kansas faced persistent budget problems following the Brownback-inspired tax cuts. The bill enacted this year largely rolls back those policies, raising rates and eliminating an exemption for more than 330,000 farmers and business owners.
After legislators overrode Brownback’s tax veto, Moody’s Investors Service changed its outlook for Kansas’ credit rating from negative to stable and described the event as “credit positive.” It said in a report that the tax increase will reduce the state’s budget problems to “more manageable dimensions.”
The governor has said the state’s budget woes were caused by slumps in agriculture and energy production. Through last year, a more conservative Legislature appeared to agree with him.
Lawmakers tinkered with income tax deductions in 2013 and raised sales and cigarette taxes in 2015 to patch budget holes. They also moved money from highway projects and scaled back contributions to public pensions.
Voters last year elected more Democrats and moderate Republicans. New lawmakers said repeatedly that voters told them to find a permanent budget fix.
But that bipartisan group of legislators still produced 2018 and 2019 budgets that wouldn’t balance without taking money from highway projects and shorting pension contributions – a total of about $830 million over two years.
Brownback’s allies took note, and a few quickly appropriated an anti-President Trump hashtag on Twitter, #YouWereDuped.
“This is so we can pretend that we have a balanced budget, that there has been some sort of structural fix,” said Sen. Mary Pilcher-Cook, R-Shawnee. “This is a fake budget that does not pay our bills.”
Legislators were trying to close projected budget shortfalls that at one point totaled more than $1 billion through June 2019. Also, the Kansas Supreme Court ruled in March that education funding was inadequate; lawmakers approved a plan phasing in a $293 million increase over two years.
The Legislature’s research staff calculated that the mix of budget and tax policies would work for two years and leave the state with a modest cushion of cash reserves.
But the researchers also said that without tapping road dollars and scaling back pension contributions, the state could face significant budget shortfalls again by 2020. That would force lawmakers to consider spending cuts or a new round of tax increases.
Moody’s report improving the state’s credit outlook cited both the diversion of highway funds and the state’s long-term pension liabilities as ongoing concerns. Legislators in 2012 committed to closing the long-term funding gap in the pension system by 2034; that date now may be pushed back a decade.
“Kansas’ budget story has been pretty messy the last couple of years, but I think that the tax increase will make the story a lot cleaner in the next couple of years,” said Dan Seymour, a Moody’s vice president.