Despite claims to the contrary by Gov. Sam Brownback and his staff, Kansas is still on path to toward a cumulative $2.4 billion deficit (in the absence of severe budget cuts) by fiscal year 2018.
How can that be so, given the governor’s claims of a robust economy? At the end of September, the governor and some department heads put a spin on revenue and labor data in an attempt to create an impression that already revenues are increasing and drastic program cuts will not be needed. That claim has little foundation.
The Sept. 30, 2012, Mercury published an Associated Press article with the title “State tax surplus: Collections exceed projections by 5 percent.” This was highly misleading. According to the official Kansas publication on State General Fund Receipts, the cumulative surplus (revenues in excess of expected collections) at the end of September was 1.1 percent, following a cumulative deficit at the end of August of -1.2 percent. The Department of Revenue’s claim of a 5-percent surplus required some fancy arithmetic on month-to-month changes to conjure up a deceptive number.
Incidentally, the boost in revenues for September came almost entirely from unexpected corporate tax payments. Indeed, when October collections were tallied, that report says Kansas collected $37 million less in taxes than anticipated for October, a 7-percent shortfall.
The Kansas Department of Labor, in the same Sept. 30 article, noted that employment rebounded in 2011. That is true, just barely. However, in 2012 the employment numbers have been rather flat, and in August and September employment is less than in January. In another survey, from which unemployment figures are calculated, the labor force has trended downward throughout 2012, though in the last month the unemployment rate did fall.
To summarize, based on revenue and labor market trends, we have no reason to think that the state can avoid drastic cuts in programs. Education, being more than half the budget, will surely be cut if last year’s income tax reductions are not undone.
The governor’s plan is a stealthy plan that will sneak up on us. What has been passed by the Kansas Legislature and signed by the governor, is the INTENTION to lower taxes. For this current election cycle, those persons who are running for office on the basis of promised tax cuts can look great. Intentions of future program cuts have remained unspecified.
The actual income tax reductions begin next year, 2013. Already the upcoming 2013 tax cuts have required some spending adjustments. But the real whammy comes in fiscal 2014, which begins in July of 2013. It is only in 2013-14 that the impact of reduced revenues will catch our attention. In 2014, the tax cutters will not look so grand. They will have become the education and health care cutters.
Should the Legislature choose to retain our education programs instead of cutting them, tax increases will be mandatory. Gov. Brownback has already sent up a trial balloon — Let’s keep the sales tax at 6.3 percent. Remember, Gov. Mark Parkinson raised the sales tax from 5.3 percent to 6.3 percent to offset the revenue loss from the recession. (The positive balance in the Kansas General Fund at end of the last fiscal year is there because of the sales tax increase under Gov. Parkinson, not because of any significant actions of Gov.Brownback or robust economic growth.) The sales tax rate was scheduled to fall back to 5.7 percent, according to Parkinson’s plan at the end of next June. It may not happen.
Although the governor wants our income taxes to be lower than those of surrounding states, what about the sales tax? While we pay 6.3 percent on food purchases, Nebraska and Colorado exempt groceries and Missouri limits the sales tax on groceries to 1.225 percent. This issue is especially sensitive at a time the Kansas food sale tax credit — designed to offset the regressivity of the tax — was eliminated in the 2012 Legislature.
In addition to the sales tax burden, we can expect some property tax increases from the county and city, which must provide services mandated by the state but have suffered reductions of state grants that pay for them. Schools also will have to raise property taxes.
Thoughtful legislators will strongly consider repeal of the income tax cuts immediately after the next session begins in January 2013.
Ed Olson, 3639 Everett Drive, is a professor emeritus of economics, specializing in public finance, at KSU. From the late 1990s until 2010, he served on the Kansas Consensus Revenue Estimating Group, which provides financial projections and guidance to the Kansas Legislature.