Gov. Sam Brownback’s proposed solutions for the state’s projected $290 million budget deficit inspired backlash from lawmakers in both parties Thursday
Brownback wants lawmakers to agree to either sell off expected proceeds from a settlement with tobacco companies for one-time cash or delay a $100 million payment to the state’s pension fund until September 2017.
Otherwise, the state must make significant cuts to education and other services, the state’s budget director says.
But some lawmakers say the governor is ignoring a simpler solution: closing a tax loophole that allows owners of some businesses to pay no income tax on their profits.
“Gov. Brownback is asking us to take our finger out of the dike and stick our heads in,” said Rep. Mark Hutton, R-Wichita, after a meeting of the House and Senate budget committees Thursday.
Some lawmakers were more open to the governor’s ideas, but wouldn’t say whether they supported a specific plan at this point.
“These are just three options the governor produced and we’re going to look at and evaluate,” said Sen. Ty Masterson, R-Andover, the Senate budget chairman. “I’m sure none of the three will come out exactly as he’s intended. It could be a combination.”
All of the proposals involve taking $185 million from the state’s highway fund. The Kansas Department of Transportation has already announced the delay of 25 construction projects as a result.
Every scenario offered by the governor also involves a cut to higher education.
The scenarios for filling the rest of the budget hole for this and next fiscal year:
▪ Option 1: Borrow against expected future revenues from a legal settlement with tobacco companies to get $158 million now.
▪ Option 2: Delay paying $100 million to state’s pension fund until September 2017.
▪ Option 3: Cut spending across the board for state agencies, universities and school districts.
The tobacco settlement money is used to fund early childhood programs, such as Early Head Start and Tiny K.
Under the governor’s plan, the state would keep $42 million of tobacco settlement money for these programs each year, but the rest of the money, an estimated $16 million in fiscal year 2017, would go to pay off banks that purchased the future revenue stream for the next 20 to 30 years.
Hutton criticized the governor for pursuing a plan that would lock the state into a 20-year commitment while providing only a short-term budget fix.
He said closing the income-tax loophole would provide a long-term solution. “If we would fix that one problem, we wouldn’t need any of these options,” Hutton said.
The leaky faucet
Shawn Sullivan, the governor’s budget director, has repeatedly said the governor does not think now is the time to debate taxes.
Sen. Laura Kelly, D-Topeka, grilled Sullivan about that.
“Why is this not a good time to discuss revenue enhancement?” she asked. “… It’s clear to anybody looking at it with a rational eye that we have a huge problem that we need to be addressing.”
Sullivan said ending the business income tax exemption would not fix the state’s financial problems, which he blamed on the high cost of K-12 education and Medicaid.
More than 331,000 tax filers used the business exemption in the 2014 tax year, according to the Kansas Department of Revenue, leaving more than $7.6 billion in income untaxed by the state and costing the state about $211 million in revenue.
Brownback championed the business tax exemption, which took effect in tax year 2013, contending it would spur economic growth.
But the state has lagged the nation in job growth. It saw no increase in total nonfarm jobs between March 2015 and 2016, the seventh worst performance in the nation, according to the U.S. Bureau of Labor Statistics.
Sen. Jim Denning, R-Overland Park, said if the state adjusted the exemption to require that any business that benefits must have an employee, that would generate about the same amount of revenue as the governor’s tobacco settlement proposal and provide a longer-term solution.
Denning compared the state’s finances to a leaky faucet and said using one-time money would fail to stop the drip. “I think it’s about time we just fix the darned leaky faucet and get this thing behind us.”
Denning said it’s been indicated to him that the governor wouldn’t automatically veto a plan to roll back or tweak the exemption, but the governor’s office appeared to reject that idea Thursday.
“The Governor does not believe taxing our small business job creators is the way to grow the Kansas economy,” said Eileen Hawley, the governor’s spokeswoman, in an e-mail. “A stable regulatory and tax policy environment is important in attracting and retaining businesses.”
Hutton said support for rolling back the exemption is growing in the Legislature, but added, “We need to get leadership on board.”
‘A heavy lift’
Masterson said he didn’t think rolling back the tax exemption would solve the state’s immediate revenue problems because there would be a delay before it could be implemented.
But he acknowledged the possibility the Legislature might tweak the policy at some point.
“I don’t think there’s anybody that would say if a policy isn’t doing what you intended to do, that you wouldn’t look at adjusting it to get it to do what you intended,” Masterson said. “The purpose was to support small business. If it becomes factual that it’s not doing that, then I do think you’d have an opening to make a change to that. It’s really too early to tell.”
Rep. Marvin Kleeb, R-Overland Park, the House tax chairman, said he understands the desire to look at the business exemption, but expressed doubts that a bill to change it would pass in the 125-member House.
“Last year we got 27 votes for a pass-through (business exemption) fix. We barely could get a tax package last year and now this is coming up again. Are people going to vote for it this time or is this merely a political discussion?” Kleeb said. “So I think it’s very prudent to look at these other options.”
Senate President Susan Wagle, R-Wichita, supported efforts to end the exemption last session, but in an e-mail Thursday she said she opposed any tax increase this session.
“The short-term fixes and one-time funding solutions the Governor has presented are not ideal; however, raising taxes is not the answer,” she said. “Making ends meet will be a heavy lift for the legislature, but I am confident we can find a resolution quickly.”
The state’s universities, meanwhile, are bracing for a cut Brownback can enact without legislative approval.
Wichita State University could lose $2.2 million if the state moves forward with a 3 percent cut or $3.7 million if it opts for a 5 percent cut instead.
“Although these are difficult times, we will continue to position the university to grow enrollment by delivering great educational, career and life value to students who choose Wichita State,” WSU President John Bardo said in a statement. “We will weather whatever occurs at the state level. And all of us on the executive team remain committed to avoiding layoffs or furloughs.”
Mark Tallman, spokesman for the Kansas Association of School Boards, said if the state moves forward with across-the-board cuts and reduces education funding by $57 million, many school districts would either be forced to raise local property taxes or lay off staff.
Rep. Ron Ryckman, R-Olathe, the House budget chairman, said his preference would be that lawmakers “continue our commitment to K-12 and not touch the block grant.”
Sullivan said using the tobacco settlement money would protect education and other state services from cuts and provide a bridge until the next legislative session, when lawmakers plan to craft a new school finance formula.
However, Tallman said using one-time money to plug the budget hole now would mean that the state would continue to face budget holes in the future.
“The major concern there is you’re filling fiscal year ’17 with 100 and some million dollars that won’t be there in ’18,” Tallman said. “… I think the question for most of our members would be: Why is a one-time chunk of money that goes away worse than considering revenue?”
“We just need to add to the list of options,” he said.