Gov. Sam Brownback will include proposals to increase tax revenue to help fill a projected budget hole when he unveils his budget plan later this week, his chief of staff says.
He also will tackle education spending, which accounts for more than half of the state’s budget, as part of his proposed fix, said chief of staff Jon Hummel.
When Brownback starts his second term — and the 2015 legislative session — on Monday, he will have to balance his signature tax-cut policy with a deficit projected at $648 million in the next fiscal year. His handling of this challenge, which his critics say is self-imposed, could define his legacy as governor.
“The governor has had a very consistent policy of wanting to limit growth in spending. He wants to keep income taxes low,” Hummel said. “And you know, circumstances have changed. Revenue didn’t come in quite as was projected. ... If we can do some things on the tax side and do some things on the budget side and still maintain that overall philosophy, then he’s always been open to that.”
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Hummel, who took over as the governor's chief of staff this month, said the proposal is ready, but he would not provide details about it. The governor will deliver his State of the State address Thursday night and offer his spending plan Friday.
Brownback said his proposed two-year budget would be “revenue positive,” meaning it would leave the state with a surplus.
He said his budget is the start of the discussion and that the Legislature will decide “what they want to do.”
“But we will lay out a two-year budget. It will be in balance. It will be revenue positive,” Brownback said.
Although the budget will include what he called revenue enhancements, Hummel said the bulk of the administration’s proposals would focus on curbing spending. “It’s not so much cutting spending as limiting the growth in spending,” he said.
He confirmed that education spending, which Brownback left largely unscathed in the plan he announced last month to trim this year’s budget, would not remain untouched this time around.
“School finance will be part of our budget conversation,” Hummel said. “The governor feels like the growth in spending that’s occurred the last several years in school finance is unsustainable. He’s going to encourage them (the Legislature) to look at ways to do that, to address that. There’s different ways to do it. You could reform the current system or you go to a completely new system.”
Brownback’s budget woes present a political puzzle that’s difficult to solve.
In 2012, he championed and signed into law an income tax policy that significantly lowered rates for wealthy Kansans and eliminated income taxes for certain types of business, promising the changes would act like a “shot of adrenaline” to the Kansas economy.
Now the state faces a budget shortfall caused by the drop in income tax revenue and a projection that the Kansas economy will grow at a slower rate than the national economy this year.
Though it’s unclear exactly what Brownback will propose, a number of options have been floated by lawmakers and others:
▪ End some existing sales and income tax exemptions. Senate President Susan Wagle, R-Wichita, has expressed an interested in closing exemptions as a way to shore up the state’s finances. It’s not the easiest political move, and there’s the question of which exemptions to end. The Kansas Farm Bureau, which backed Brownback’s re-election, is protective of agribusiness sales tax exemptions, for example. And ending charitable sales tax exemptions for thing like Girl Scout cookies is not likely to be popular.
▪ Increase taxes on alcohol and tobacco. Sources say this is likely to be part of the package Brownback puts forward. The governor could frame an increase on taxes on liquor and cigarettes as a public health plan, suggested Michael Smith, a professor of political science at Emporia State University.
▪ Raise sales taxes. Former Gov. Mark Parkinson did this temporarily during the recession and Brownback pushed to make Parkinson’s change permanent in 2013. Smith noted that conservatives are more ideologically open to sales taxes than income taxes.
▪ Delay additional income tax cuts. Brownback’s Democratic opponent, Paul Davis, proposed freezing tax rates at 2015 levels, which would have generated an additional $735 million in tax revenue through fiscal year 2019. The income tax rate already has dropped for 2015, to 4.6 percent for the upper bracket and 2.7 percent for the lower bracket. But it is set to fall again in 2016 and 2018.
▪ Change the cap on additional tax revenue. Part of the tax law says if tax revenue increases by more than 2 percent, tax rates will be drop further. Sen. Jim Denning, R-Overland Park, said that cap should be raised and that the additional revenue should go to tax relief only if it reaches 4 percent. If revenue increases 3 percent, additional money should go to a rainy day fund, he said.
Senate Minority Leader Anthony Hensley, D-Topeka, said it would be ironic if Brownback had to use the Davis plan, but he said the governor should give the option serious consideration.
“The guy has deceived the voters of Kansas and has done it time and time again,” Hensley said. “He needs to take his head out of the sand, face reality and acknowledged that this is a huge problem he created.”
Bob Beatty, a professor of political science at Washburn University, said picking up Davis’ old plan would not be an attractive option for the governor politically.
“If he even pauses them (tax cuts), I think it’ll be a major blow to his gubernatorial legacy, so it’s going to have to be from somewhere else,” Beatty said.
Hummel said the governor’s plan would differ from the Davis plan. “If you want to know what we’re likely to do, I would look at what we’ve proposed before and statements that he’s said before. This is not going to be inconsistent with his previous proposals.”
Legislative leadership views
Despite the dismal budget outlook, Brownback’s optimism has not faltered, at least not publicly.
“Kansas is strong and on the rise,” he said Thursday morning when asked about his mood heading into his second term.
A few hours later The Associated Press reported that a federal grand jury is investigating loans to Brownback’s re-election campaign. The only loans the campaign received were from Brownback and Lt. Gov. Jeff Colyer.
The administration has dismissed the investigation as being without merit. But Beatty said it could hamper Brownback as he tries push through a budget fix.
“Certainly being under investigation weakens a governor,” Beatty said. “It weakens his ability to persuade…all those tools you use to get that bill on your desk the way you want it to be.”
Brownback needs the Legislature to approve more than $200 million in one-time sweeps from the highway fund and other sources to keep the state financially solvent through June. He then needs lawmakers to pass a budget that fills a $648 million hole for the next fiscal year.
It’ll be members of his own party that he has to sway. Republicans hold a combined 129 of the 165 seats in the two chambers of the Legislature. Republican leaders have not presented a united front on the budget.
Wagle and Senate Vice President Jeff King, R-Independence, have repeatedly said that all options are on the table.
But Senate Majority Leader Terry Bruce, R-Hutchinson, thought differently when asked if revenue enhancements should be coupled with spending cuts. “We need to prioritize and make it priority to find efficiencies in government first. Start from cutting … and only as a last option do you look at revenue enhancements.”
House Speaker Ray Merrick, R-Stilwell, has also resisted the idea that tax increases should be an option.
“We are looking at spending first,” Merrick said in an e-mail the week before the session. “Kansas families need to keep more of their money. That’s accomplished by streamlining government and getting the most value out of every tax dollar.”
Wagle said both she and Merrick are committed to finding a solution.
“Everybody has a different point of view right now about how to fix it,” Wagle said. “So we need to spend some time talking to each other about different ideas and there’s some legislators that have some very creative ideas that haven’t been used in the past.”
‘Nothing’s off the table’
Rep. Ron Ryckman, Jr., R-Olathe, the House Appropriations Chair, said he has been meeting regularly with Rep. Marvin Kleeb, R-Overland Park, the House Taxation Chair, to discuss possible solutions. He said they planned to exhaust options to cut spending before turning to taxes.
“That’s what we ran on. We’re going to try to look for the efficiencies, exhaust the spending, but we’re also trying to balance the entire thing,” Ryckman said. “Nothing’s off the table even with the speaker.”
As lawmakers mull over a potential budget fix, they do so with the knowledge that a three-judge panel ruled late last month that Kansas schools are unconstitutionally underfunded. If the Kansas Supreme Court upholds that ruling, the budget gap will widen.
Standard & Poor's, a bond rating agency that downgraded Kansas last year, released an analysis of the state's finances Friday that said the court ruling and projected deficit "raise additional obstacles” to balancing the budget in the next fiscal year and beyond.
Some conservatives have pushed for a rewrite of the school finance formula as a way to fix the state's budget problems long-term, contending there are ways to direct more money to the classroom while still lowering the overall cost to the state.
Bruce and King said it would be difficult for lawmakers to completely rewrite the school finance formula this session.
“Most people agree that we need to simplify it. We just don’t agree how to. I think there will be efforts to simplify the formula, make it clear, make it more transparent…but it is such a challenging enterprise that it’ll be very difficult to accomplish in one session,” King said.
He said lawmakers should not enter the session saying that certain parts of the ledger are off limits.
“Literally all options have to be on the table at this point,” King said.