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Ending Brownback’s Tax Experiment Gave Kansas a Cash Boost

The rollback of Gov. Sam Brownback’s tax cuts in 2017 produced a state budget surplus that ballooned to $1.1 billion – a sharp turnaround after years of shortfalls. But state spending is now beginning to catch up.

(TNS) — It sounds strange to say about a state that crawled out of a fiscal disaster not too long ago, but the fat days in Kansas are coming to an end.

The rollback of Gov. Sam Brownback’s tax cuts in 2017 produced a state budget surplus that ballooned to $1.1 billion – a sharp turnaround after years of shortfalls.

Yet as quickly as they came, the days of easy cash appear numbered.

Lawmakers expect to have a few hundred million in extra funds available next year. After that, state finances become much tighter.

The shrinking surplus, combined with looming elections, is expected to intensify pressure on lawmakers in 2020 as they seek to steer money toward their favored programs.

Big decisions are approaching that will shape Kansas for years to come. Gov. Laura Kelly and other supporters of Medicaid expansion may have their best shot at finally covering more uninsured poor, which could cost tens of millions of dollars.

Many state agencies, still recovering from Brownback-era austerity, want more. Higher education leaders plan to ask for millions for universities, which still haven’t recovered from cuts made during the Great Recession.

“I think we still have to address a lot of the unmet needs we have,” said Sen. Tom Hawk, Manhattan, the ranking Democrat on the Senate’s budget committee.

Lawmakers must balance taxes and spending. And then there’s the specter of recession -- a possibility that could leave state finances once again battered.

State officials and university economists will produce a fresh forecast of tax revenue this week. The new projections may improve the long-term outlook somewhat.

But the current trends are clear. Unless something changes, Kansas is on track to spend more money than it takes in this fiscal year, and in the years to come.

Lawmakers have approved $7.8 billion in spending from the state general fund during the current fiscal year that ends June 30. At the same time, the state is expected to take in $7.4 billion in revenue.

The anticipated gap means Kansas is digging into the cash reserves it has accumulated over the past few years.

“We’re in deficit,” said Rep. Steven Johnson, an Assaria Republican who chairs the House Tax Committee. “We’re just lucky that we have that carryover balance.”

‘Just To Maintain ... Is Not Enough’

Under current projections, Kansas should begin the next fiscal year – which starts in July – with roughly $300 million in the bank. That turns into a shortfall of $55 million the following year and about $563 million the year after.

While revenue is growing—by close to an anticipated $400 million over the next three years—spending is projected to rise more quickly.

The Legislature has approved hundreds of millions in new spending over the last two years. Much of it is driven by the Kansas Supreme Court, which insisted that the state ramp up annual public school funding by more than $500 million.

“Just to maintain what we’re doing as a state is not enough right now, from a revenue perspective,” said John Wilson, director of the advocacy group Kansas Action for Children.

It’s possible the new revenue forecast will shrink the size of the anticipated shortfalls, but there’s no guarantee. Officials and economists take into account economic forces, past tax collections and other trends when developing estimates.

Many lawmakers expect they will eventually confront difficult choices over spending and taxes – if not in 2020, then in the years to come. The possibility of tighter budgets sometime in the future is already affecting legislative debates.

When Senate Majority Leader Jim Denning, an Overland Park Republican, rolled out a Medicaid expansion proposal last month that he said was budget neutral, he noted Kansas was spending more money each day than it brings in.

“So we all know how that’s going to end up,” Denning said. “We’ve lived through it once before.”

Tax Fights Ahead

The Brownback tax cuts, in place from 2012 to 2017, still haunt some lawmakers. Tax collections fell below estimates month after month, leading to several rounds of budget cuts and a sales tax increase in 2015.

As Brownback’s popularity plunged, lawmakers in 2017 repealed much of the policy over his objections. For the Republican-controlled Legislature, the vote was a near-herculean feat.

The shrinking cash reserves mean lawmakers may revisit tax policy sooner rather than later, however.

A tax reform council formed by Kelly is already meeting. It plans a preliminary report ahead of the 2020 session, and a final report by 2021 – suggesting the governor expects the Legislature to grapple with the topic over the next couple years.

“We know we’ve got the school issue allegedly solved if they don’t mess with it. So they know what that’s going to cost at this point,” said Mark Desetti, a lobbyist for the Kansas National Education Association, the teachers union. “And now it’s, ‘what are we going to do take care of these other needs of the state?’”

Wilson, a council member, called the revenue shortfalls projected in the coming years concerning, “especially as we have organizations and individual lawmakers who want us to cut revenue in some form or fashion.”

Sen. Ty Masterson, an Andover Republican, said if there’s a budget problem to solve in the future, it centers on spending.

“We’ve raised taxes so high, there’s plenty of revenue right now at the government level,” Masterson said.

Many Republicans are certain to resist any future attempts to raise taxes. For the past two years, GOP leaders have tried – and failed – to get a tax bill of their own into law.

This spring, Kelly vetoed a bill designed to hold down corporate tax bills and allow Kansas residents to itemize their state income taxes even if they don’t itemize on their federal taxes. The measure also contained a formula to lower the tax rate on food using increased revenues from internet sales.

Republicans contend the failure to pass a bill was itself a tax increase. It would have cost Kansas about $90 million in revenue if it had become law.

Senate President Susan Wagle, a Wichita Republican, said she and Kelly have “very different” budget priorities.

“Governor Kelly has already raised sales tax on her own. She is opposed to returning the Trump tax cuts and is committed to implementing new socialist spending policies that we simply can’t afford,” Wagle, who is running for U.S. Senate, said in a statement.

Kelly said she’s urging caution. After Brownback’s tax cuts, “we must allow adequate time to recover and rebuild,” she said in a statement.

Kansas is slowly rebuilding, she said, adding that projected revenue numbers are “encouraging and remain stable” as a result of ending the tax experiment.

“Kansas is on the road to recovery, we need to move forward cautiously and deliberately,” the governor said.

Specter Of Recession

Whatever lawmakers hope to accomplish, the threat of recession hangs over everything. A shrinking economy would harm tax collections.

Since the end of the Great Recession a decade ago, the United States has enjoyed the longest period of economic expansion since World War II. But fears of a downturn have been growing.

President Donald Trump’s trade war with China has taken a toll, and growth has slowed globally. The Federal Reserve on Wednesday cut short-term interest rates – its third reduction this year – to keep the economy humming.

When officials produced the last Kansas revenue forecast in April, they wrote in a memo that while the economy continues to grow, “significant concerns exist” related to volatile energy prices and tariffs.

In January, Kelly warned another recession is ahead, calling it a question of “when” not “if.” At the time, she said Kansas was “completely unprepared” for a downturn.

The surplus Kansas has built, though declining, would help state government weather a recession. But it will quickly evaporate if tax revenues fall.

“I think the greatest threat to us at this point is the possibility of moving into a recession,” Desetti, the KNEA lobbyist, said.

©2019 The Wichita Eagle (Wichita, Kan.). Distributed by Tribune Content Agency, LLC.

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