The Budget Blog

The tax plan and the budget

By Duane Goossen

February 10, 2012

The governor’s proposed tax plan has sparked lively debate and already has been the subject of much analysis. However, little attention has been given to a key provision that may have the most effect on future Kansas budgets.

Under the tax plan, if State General Fund receipts grow by more than 2 percent over the previous fiscal year, that growth would trigger an automatic income tax cut the following year. During periods of economic growth, tax rates would readjust downward, keeping state tax revenue relatively flat, rather than growing with the economy. In practical effect, this provision would limit future State General Fund spending growth to 2 percent or less, and may make it even more difficult for the state to deal with the financial pressures of Medicaid growth, school finance, fixes to the Kansas Public Employees Retirement System and normal inflation in other programs.

As shown in the chart below, State General Fund revenue normally grows by amounts greater than 2 percent. Revenue declined during recessionary times — FY 2008 through FY 2010, and FY 2002 — and declined in FY 1999 as a result of tax cuts. Tax increases were implemented in FY 2011 and FY 2003, but most revenue growth has come from economic activity. If a tax cut had been implemented each time revenue grew by more than 2 percent, the chart would look very different.

SGF Revenue Growth

How would the provision work? After the state fiscal year ends on June 30, the amount of revenue growth would be determined. Let’s say revenue had grown by $300 million, or about 5 percent. The amount of the difference between 2 percent growth and 5 percent growth, about $180 million, would then be used to calculate individual income tax and corporate income tax rate cuts that would take effect January 1 and lower future collections by $180 million.

With the proposed limit in place, even if the economy grew substantially, the state budget would not experience much of the benefit.

The text of this provision from Section 45 of House Bill 2560 is below.

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