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May 4, 2012
The Legislature’s tax conference committee reached agreement this week on a tax plan that lowers income tax rates, and the Kansas Legislative Research Department released a projection showing how state finances might look if the tax plan were enacted.
The projection presents a worrisome picture. It shows likely revenue through fiscal year 2018, makes a calculation of what the state might spend and computes an ending balance for each year. Even though projections like this cannot perfectly forecast the future, it still pays to look carefully at what they show, because the tax plan will affect state finances far beyond the next budget year.
The revenue projection starts with the official consensus revenue estimate for FY 2012 and FY 2013. For FY 2014, the projection assumes revenue will grow 4 percent but that the state sales tax rate will drop as planned, which means overall revenue in FY 2014 goes down. After FY 2014, revenue is presumed to grow 4 percent annually. The projection then deducts the cost of the tax plan for each year. Actual revenue growth will certainly turn out to be something different than 4 percent, but a 4 percent growth projection is a standard calculation for state government and fits with past practice.
The expenditure projections, however, seem unrealistically low. The increase shown for FY 2014 is $68.6 million, or 1.1 percent. Normal rises in Medicaid caseload costs could easily consume most of that increase. From FY 2014 onward the projection assumes expenditures will increase about 2 percent each year. Again, Medicaid caseload costs and required upward adjustments in KPERS funding could take most of the increase, let alone any new spending for school finance, higher education, state employee salaries and other program inflation. Over the past 30 years, even calculating in the recession years, State General Fund spending has on average grown 5.3 percent a year.
The worrisome part of the projection shows up on the very last line, which measures whether receipts and expenditures balance. This projection shows that starting in FY 2014, and each year after, the state will spend more than it takes in.
Using this projection, we can conclude that if the tax plan passes, state finances will decline unless overall state revenue regularly grows at a rate greater than 4 percent or state spending growth is held even lower than an already unrealistic 2 percent.