December 30, 2015
Kansas governor Sam Brownback’s fiscal experiment has brought so many unprecedented changes and impacts to the state budget that it’s earned its own designation among other states—even conservative states—seeking similar tax-cutting proposals: “the Kansas Effect.”
It is not an endearing term, said Duane Goossen.
“As other states are considering different kinds of tax policies, they ask how they compare to Kansas,” he said. “They then take very deliberate steps to not do what Kansas did.”
As if that weren’t bad enough, major news media outlets in the United States and abroad have written a great deal about the state’s budget and financial outlook, he added, and little of it is good. “They’re now watching to see what happens when a state goes clear over to the edge like Kansas has.”
Goossen, Kansas Center for Economic Growth Senior Fellow, seven-term member of the Kansas House of Representatives and former budget director for 12 years under three governors, addressed members of the Kansas Farmers Union during their annual convention in Topeka in mid-December. Kansas, he said, is now in a uniquely precarious position.
“If we were to array all of the states in the U.S. on a spectrum based on how they’re handling their finances, and based on the states’ financial health, you’d find Kansas way over on one end of the spectrum, because we’re broke,” he said. “We’re not taking in enough money to pay for even a very conservative set of expenses. We have become, in fact, a bit of a spectacle to the rest of the nation.”
The implications are far-reaching and severe for all portions of the state, he warned, but rural communities will be affected the hardest.
The budget crisis can be traced back to a tax cut bill that passed in 2012 and was modified in 2013, he said. Income tax rates were cut sharply across the board and business cash-through income was exempted from all tax liabilities. The theory behind the bill sounded good, though—perhaps too good.
“The theory was, if you cut taxes this sharply it would generate such lively economic activity that tax money would roll in to easily fund the Kansas budget,” Goossen said. “It was a wonderfully seductive argument. But when taxes were cut, in the first full year of implementation, revenue went down sharply.”
In fact, the state’s revenue dropped over $700 million. During fiscal year 2015 revenue grew a small amount but still fell far short of expenses, a pattern that should repeat itself during the coming fiscal year, he said.
The growth isn’t what it appears. Much of what appears to be increasing revenue is nothing more than robbing from other funds to fill budgetary gaps, and fiscal year 2016’s increase will be due to increased sales tax and cigarette taxes.
“That’s what’s causing this growth, otherwise we would still be down,” Goossen said. “One of the ironies of this situation is that this was supposed to be a tax cut. Instead, lowest income Kansans are paying more, middle income Kansans are about a wash, but the wealthiest Kansans have come out ahead. It’s been a tax shift, not a tax cut. And it has left us with a budget and a set of finances that don’t work.”
Meanwhile, the state’s expenses in the general fund are well over $6 billion and growing, he said. “You can deal with that if you’re willing to grab money from somewhere else in order to fill the gap,” he said, “but do that long term and eventually you’re done.”
As revenue dropped, lawmakers blew through the reserves and the savings to fill the gap. In fiscal year 2015 they started cutting the budget, shifting funds, pulling expenses down as far as they could go, but it still wasn’t enough. They reached into the highway fund and just about any other fund that had money in it, and used it to try to shore up the budget.
“But it doesn’t fix the situation,” Goossen said. “Unless we make that income stream balance out, Kansas cannot go forward financially. We are in crisis, year after year after year, and what that means is that all the energy from our lawmakers goes into trying to figure out how to make it work out. They’re not looking at the future—they’re looking at ways to get by. It’s a terrible place to be in.”
Robbing from the highway fund is already having negative impacts on road maintenance, he said. The state used to provide maintenance on 1,200 miles of roads every year, now it’s down to 200. Bridge reconstruction has been cut in half. “Maybe you can cut back on it for a short period of time and not notice, but eventually it becomes a real problem,” Goossen said. “And it’s especially a problem for rural communities because they depend on those roads, and the roads won’t stay in shape if we keep diverting significant amounts of money from those funds.”
The governor recently took another $50 million from the highway fund to try to keep the state solvent for this fiscal year, he said. But with expenses almost $800 million higher than expected revenues, closing that gap will not be easy.
Education is another major problem area for rural communities. In the past, schools received a certain amount of money per pupil, Goossen said. If enrollment went up, schools received more money. They also got more money if they were a small district or had low enrollment.
“That helped rural schools all across Kansas,” he said. “And now the finance formula has been thrown out.”
In its place is a new formula based on a block grant. In a nutshell, he said, it means that schools get what they got last year, without any increases. “If rural schools are put out there on their own, if they have to raise their own money to fund their operations, it’s going to mean a huge property tax increase or a deep cutback for what rural schools can provide,” he said. “Schools are critical to any small community in Kansas.”
Regardless of the dire changes and impacts, Goossen said, he still believes there’s some hope for the state.
“I believe that by and large Kansans have caught on to what has happened, and they’re understanding the things have gone wrong,” he said. “if that’s true, if Kansans really believe that we’re not in a good spot, there’s hope that that can be harnessed to make changes and get back on the right track. But none of that is easy and it’s going to take work from every person, every citizen. I really believe that the future of our state hangs in the balance.”
Read more from the Kansas Farmers Union here.