Gov. Sam Brownback blamed the state’s financial troubles on global factors in his first interview since the state’s $290 million budget hole was announced, pointing to dropping oil and agriculture prices as the cause of the shortfall.
“I mean, we’ve got a global commodity market that’s fallen off badly. You’ve got a number of commodity-based states that are struggling now budgetarily,” Brownback said Friday.
He also said any tax increase “would have negative impacts on the state” when it already faces economic challenges. Some lawmakers want to roll back a business tax exemption that Brownback championed.
Kansas is not the only state in the region dealing with a budget shortfall. Neighboring Oklahoma slashed spending last month by 7 percent through June in the face of a $1.3 billion shortfall largely blamed on dropping oil prices.
Ken Kriz, an economist at Wichita State University, warned against overstating the role of the commodity market in creating the current budget shortfall.
“It plays a role, but if you want to say it’s anything other than a small role you have to be an extremely brave person that thinks he knows more than anybody else,” Kriz said. “… Did it play a role? Sure. Everything plays a role.”
Kriz said Oklahoma is more reliant on oil for tax revenue than Kansas. “The weakness everybody’s talking about is in the income tax receipts and the income tax receipts should be based upon more than just oil and agricultural, so I’m loathe to blame it on a worldwide commodity glut.”
A number of factors likely contributed to the most recent shortfall, he said, including both a sluggish aviation sector and the income tax cuts Brownback ushered into law in 2012.
“The softness in the revenue didn’t start with the commodity cycle. … It started in 2013 when the projections were we should have runaway revenues,” Kriz said.
Kansas began the 2014 fiscal year, the first full fiscal year with the tax cuts in place, with more than $700 million in its cash reserves.
However, Kansas faced a budget shortfall in 2015. It responded by cutting spending and raising the sales tax from 6.15 to 6.5 percent. Despite that, it has a budget hole again this year.
Repealing income tax exemption
Some lawmakers say the state should repeal an income tax exemption championed by Brownback that allows 330,000 business owners to not pay state income tax on their business profits. Doing this would generate more than $200 million in revenue for the state.
Brownback has balked at the idea of using taxes to fill this new budget hole.
“We’ve got a global commodity falloff. You’ve got slow growth rates in the country and to exacerbate that with a tax increase I don’t think is the right way to go,” Brownback said. “We had a huge tax discussion last year and you know that tax increase didn’t net what it was projected to. And that’s because you’ve got a global problem, so why would we exacerbate the business situation we have?”
Sen. Laura Kelly, D-Topeka, the ranking Democrat on the Senate budget committee, was critical of Brownback’s comments.
“Our schools are struggling, our mental health system is a shambles, childhood poverty has skyrocketed, our job growth is pathetic, and the governor is worried about negatively impacting our state?” Kelly asked. “He needs a healthy dose of reality. The damage is done. We need to stop the bleeding.”
The state saw no gain in total nonfarm jobs between March 2015 and March 2016, according to the U.S. Bureau of Labor Statistics.
Brownback said global factors have mitigated the impact of the tax cuts, which he continues to tout as an economic stimulus.
“If you look at what’s happened with it, it’s been a positive,” Brownback said. “But you can’t make up for – what is it? – $30, $40 oil and $3 corn. You know you’ve got a big falloff in those things.”
Alternatives to raising taxes
Brownback has looked for an alternatives to raising taxes to address the budget shortfall. One option is to enact cuts of 3 percent for school districts and most state agencies.
The governor also has considered borrowing money against the state’s expected revenues from the master tobacco settlement or delaying a payment to the state’s pension fund until September 2017 – options he says he prefers to cuts.
“Either of them, I think, are reasonable and they’re ways to be able to handle the revenue situation that we’re in. … I think those are the two best fixes given the global nature of the predicament that we’ve got,” Brownback said.
Either of those plans would require action by the Legislature.