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<i>The Week in Public Finance</i>: Kansas' Experiment Ends, Alaska Still Has No Budget and Keeping Track of Debt

A roundup of money (and other) news governments can use.

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If At First You Don’t Succeed …

Kansas is rolling back its controversial 2012 income tax cuts after the Republican-controlled legislature this week succeeded in overriding a veto by GOP Gov. Sam Brownback.

The state is facing a $900 million budget shortfall and has struggled under budget deficits since the tax cuts went into effect. With the new legislation, the state’s income taxes will increase, although most tax rates will still be lower than they were before the 2012 cuts. The increases are expected to generate more than $1.2 billion for the state over the next two years. Opponents of the action call it a $1.2 billion take hike on Kansans.

On Thursday, the ratings agency Moody's Investors Service applauded the legislature's move, calling it "a significant step" toward achieving a sustainable budget.The action comes four months after lawmakers failed to override another Brownback veto preserving a tax loophole that lets scores of business owners pay no income tax.

The Takeaway: Kansas’ tax plan has long been scorned by left-leaning think tanks as a tax break that largely benefits the wealthy while gutting state services. Following the override, the Center on Budget and Policy Priorities issued a statement calling it “a striking repudiation of far-right wing economic orthodoxy and, as such, will influence fiscal debates far beyond the state’s borders.”

The center is likely alluding to President Trump’s tax proposal, which has many similar characteristics to Kansas' 2012 tax plan. Two key components of both are large income tax rate cuts and a lower tax rate for “pass-through” business income. Like Kansas' plan did, Trump's proposal says economic growth would make up for any lost government revenue.

If Kansas is a test case for such policy, it’s a telling one, particularly when looking at the legislature. Years of dealing with shortfalls seems to have worn down a lawmaking body that had initially and enthusiastically supported the tax cuts. Senate Majority Leader Jim Denning even said this week that they should have acted earlier to roll back the tax cuts. "I don’t want to be disrespectful to the governor. He still believes in this [the 2012 tax plan]," Denning told the Wichita Eagle. "That’s OK. I don't."

Still No Budget in Alaska

Alaska legislators have one week left in their special session and appear no closer to reaching a budget deal. The state has been plowing through its once-substantial rainy day fund thanks to multibillion dollar budget deficits for the past three years.

Last week, Gov. Bill Walker introduced a compromise fiscal package that included House and Senate proposed revenue-raising measures and spending cuts. In addition, it proposed reforming the state’s oil and gas tax credit program, modifying income tax and reducing residents’ annual dividend payments from the state Permanent Fund. The plan would cover the state's $2.5 billion deficit for fiscal 2018.

But it's been cast as dead on arrival. Although both chambers generally agree that modifying the state’s Permanent Fund will be part of any budget package, they don't agree on introducing new taxes. If lawmakers can’t reach a budget deal before the start of the fiscal year on July 1, the government will shut down.

The Takeaway: Alaska lawmakers have repeatedly chosen to balance the budget by using the state’s reserves. If they do so again, they'll face the same hard questions next year regarding balancing the budget -- but without the option of using reserves to do it.

Alaska has already suffered one downgrade, losing its coveted AAA rating last year thanks to its ongoing budget crisis. If lawmakers miss another opportunity to fix things, it’s hard to imagine the agencies will ignore that.

Studying up on Debt

While interest rates have been at record lows, governments have been more hesitant than ever to borrow. Why? The consensus is that the hard years of the recession and today’s constrained revenue growth have spooked many officials from increasing debt loads.

But a new study finds that only about half of the states (27) even seriously evaluate whether they can afford the debt they have and whether they have the leeway to take on more. Of those states, according to the Pew Charitable Trusts, nine "lead the way" in evaluating their debt loads: Florida, Georgia, Maryland, Massachusetts, New Hampshire, North Carolina, Oregon, Texas and Virginia.

The group of states that conduct debt affordability studies include highly leveraged states such as California and Connecticut, as well as states such as Georgia and New Hampshire, which have some of the lowest debt per capita.

Meanwhile, high-debt states such as Illinois, Michigan and New Jersey, do not produce a study.

The Takeaway: The research found that many states have trouble tracking all publicly supported debt. “Several state officials told Pew that only a handful of policymakers may know the full extent of the state’s debt,” the report says. “Challenges collecting and aggregating data, along with multiple layers of government, can pose obstacles. So can the temporary aspect of elected office, especially given the complicated nature of debt financing.”

Pew’s research shows that conducting affordability studies doesn’t automatically mean a government won’t over-leverage itself. But it at least means officials will know about it. It also means lawmakers will get help in striking the right balance between issuing bonds and paying for projects with cash financing.

To this end, Pew recommends creating studies that are mandated by statute, that put into context what the state has borrowed and its capacity to issue additional debt, and that estimate the state’s debt capacity over multiple years.

To read this regularly, subscribe to "The Week in Public Finance" newsletter for free.

Liz Farmer is a former GOVERNING fiscal policy writer.
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