Editor’s note: This story was updated at 9:45 p.m. April 20.
Kansas officials got the bad news they were expecting Wednesday.
After reading the economic tea leaves and noting that tax collections had trickled in short of expectations in 11 of the past 12 months, the Consensus Revenue Estimating Group reduced its projections for this budget year and the next one by $228.6 million.
The problem is likely bigger than that number suggests. The amount the state expects to collect in taxes over the next two years was reduced by nearly $350 million. But Republican Gov. Sam Brownback and legislators are using about $120 million in revenue transfers from the Kansas Department of Transportation and other agencies to temporarily replace some of that lost tax revenue and lower the amount of projected red ink.
Shawn Sullivan, Brownback’s budget director, said problems in three mainstays of the Kansas economy — agriculture, aircraft manufacturing and oil and gas production — are largely responsible for the gloomy forecast.
“We are facing headwinds in those three areas,” Sullivan said.
But others say the income tax cuts passed in 2012 at Brownback’s urging are to blame for the state’s continuing revenue and budget problems.
“The lowered revenue expectations released today are the product of failed tax policy — not a broken estimating process,” said Annie McKay, director of the Kansas Center for Economic Growth and a frequent critic of the governor's tax policies.
“More one-time ‘fixes’ will be used to inadequately support schools, health care and other areas key to a prosperous future for all Kansans,” McKay said. “Unfortunately, unprecedented and unaffordable tax policy continues to wreck our state’s prospects."
Former Kansas Budget Director Duane Goossen, now senior fellow at KCEG, said if the Brownback tax cuts hadn’t passed, the state would be collecting more than $1 billion of additional tax revenue per year.
“Those tax changes upended the budget,” Goossen said.
Three budget-balancing plans
Brownback is proposing three options for addressing the projected shortfalls. All three would take an additional $185 million from KDOT, forcing a two-year delay in all major highway projects. Two of the three plans also call for extending a $17.7 million cut in the 2016 higher education budget into 2017.
In addition, option one, which Sullivan said the governor prefers, includes a controversial proposal to bond part of the money Kansas receives annually under an agreement reached in the late 1990s to settle a multistate lawsuit against the major tobacco companies.
The state has used the bulk of the money, which in recent years has averaged around $52 million, to fund early childhood education programs. The governor’s proposal would earmark about $42 million a year for those programs and sell the remaining revenue to bondholders. Securitizing a portion of the tobacco settlement would generate an estimated one-time payment to the state of approximately $158 million, Sullivan said.
“There have been approximately 20 states that have done this,” he said. “There are positives and negatives to doing it. But it is one option to consider.”
If securitization proves too controversial, a second option would free up nearly $100 million by delaying the final 2016 payment into the state’s pension plan until 2018. Previously the governor had said he intended to delay it only to September.
The third option outlined by Sullivan would cut spending to public schools, universities and most state agencies by nearly $140 million in the 2017 budget year, which begins July 1.
The cuts, which would range from 3 percent to 5 percent, would reduce funding to the Department of Education and school districts by more than $57 million.
In addition, cuts of $35 million to the Kansas Department of Health and Environment would force the agency to reduce contractual payments to the companies that manage KanCare, the state’s privatized Medicaid program. The companies, Sullivan said, would likely attempt to recoup their losses from doctors, hospitals and other health care providers.
“I would anticipate that it would probably lead to reimbursement reductions,” he said.
Hensley: ‘Borderline extortion’
Senate Democratic Leader Anthony Hensley, of Topeka, accused Brownback of resorting to scare tactics to coerce lawmakers into supporting his preferred option.
“What the administration has done is to set this up in such a way as to hold a gun to the Legislature’s head to say, ‘You’ve got to go along with this tobacco securitization or you’ve got to accept these other options,'” Hensley said. “It’s borderline extortion in my mind.”
Hensley said a growing number of lawmakers on both sides of the aisle would prefer a fourth option: repealing the part of the 2012 tax bill that exempted more than 330,000 business owners from state income taxes.
“I think the people of Kansas get that that is a very unfair tax system,” he said.
When lawmakers were scrambling to balance the budget at the end of the 2015 session, Brownback used a veto threat to block an effort to repeal the business tax exemption, forcing them to approve large increases in the sales and cigarette taxes to balance the budget. But Sen. Jim Denning, an Overland Park Republican, recently said he believed the governor might sign a repeal bill this year.
When asked about Denning’s statements, Sullivan said the governor remains opposed to any changes in the tax plan.
“The governor doesn’t believe that it’s useful to have a debate at this point about raising taxes on small businesses or anyone else,” he said.