December 11, 2016
The budget crisis afflicting state government in Kansas serves as an opportunity to think creatively about filling an estimated $350 million shortfall in tax revenue.
One out-of-the-box option of potential value to lawmakers and Gov. Sam Brownback, who is preparing a new budget-balancing plan for the 2017 Legislature, would be seizure of millions of dollars tied to collection of unclaimed property by the state.
Ron Estes, the Republican state treasurer in Kansas, said the maneuver wouldn’t resolve Kansas’ budget problem.
State law requires the treasurer to seek rightful owners of all unclaimed property and directs that cash to be promptly deposited in the state general fund. In accordance with Kansas law, this revenue can and was spent by lawmakers in previous budgets.
In the last fiscal year, $44 million in unclaimed property was received by Estes’ office. A complicated feature of law mandates so-called idle funds, in an amount equal to annual Kansas receipts of unclaimed property, to be invested by the Kansas Public Employees Retirement System. If lawmakers cashed out that idle-funds portfolio at KPERS, it would yield $40 million in revenue — nothing close to the $350 million target.
“It’s just not a budget fix,” Estes said. “Regardless of the solution lawmakers use to close the budget shortfall, my office will continue striving to match Kansans with their missing or unknown property. Not only is it the law, it is the right thing to do.”
Brownback has declined to publicly reveal preferences for addressing the wide revenue gap, but apparently seeks to avoid ordering immediate spending reductions or personnel layoffs. He indicated a tax increase wouldn’t be part of his revised budget.
‘Money from heaven’
Sen. Laura Kelly, a Topeka Democrat, said the state’s revenue predicament was so acute there was little hope of avoiding state employee furloughs and profound budget reductions unless the sky opened up to deliver “some money from heaven.” She criticized Brownback for declining to use executive power to make spending cuts and argued delaying the inevitable was designed to punish Democrats and moderate Republicans after voters ousted some of the governor’s conservative allies in the Legislature.
“We obviously will be ready to come back in the first of the session with some sort of rescission bill,” said House Speaker-elect Ron Ryckman, a Republican. “Hopefully, we’ll have a unified plan.”
Ryckman said a budget plan from House Republicans would be a collaborative effort. Time is a consideration, he said, because less than six months will remain in the fiscal year when the next legislative session starts.
Conservatives in the Legislature might be preparing to exploit budget chaos to take a knife to the state’s education and social service budgets, said Rep. Barbara Bollier, a Johnson County centrist Republican elected in November to the Senate.
Bollier said tapping the unclaimed property fund, especially assets dormant for more than five years, might be a legitimate option.
“If people haven’t claimed it after two years or five years, then yes — it’s kind of like finder’s keepers,” Bollier said.
These deposits were derived from dormant checking and saving accounts, insurance benefits, oil and gas royalties, contents of safe deposit boxes, utility deposits as well as stock dividends.
Plugging a portion of the deficit with cash from the unclaimed property fund amounts to a betrayal of Kansans unaware they’re owed money by the state, said Senate Minority Leader Anthony Hensley, D-Topeka.
“That is the people’s money,” Hensley said. “It will be interesting to see how the Republicans will explore that.”
Last week, five organizations comprising the “Rise Up Kansas” coalition suggested a tax reform plan calling for closure of the 2012 income tax loophole beneficial to 330,000 business owners touted by Brownback as a key job-growth mechanism, return of the third individual tax bracket for the state’s top income earners, imposition of a 11-cent per gallon gas tax and reversal of a state law compelling income tax revenue growth be devoted to buying down state income tax rates.
“If we’ve learned anything in the last four years, it’s that we can’t have it all,” said Heidi Holliday, executive director of the Kansas Center for Economic Growth. “Yes, it would be nice if we could eliminate the state income tax and still enjoy the quality of life we expected, and deserve, in Kansas. But every month we learn how impossible that scenario is, whether in the form of new budget cuts or missed revenue targets or credit rating downgrades.”
KCEG and the coalition’s labor, education, transportation and child advocacy associations also called for a 1.5 percentage point reduction in the statewide sales tax on food to 5 percent.
Other ideas floated by lawmakers have included a higher cigarette tax and creation of a lottery tax, short-term reallocation of casino revenue and the sale of future payments to the state from tobacco companies. There has been general discussion of across-the-board and targeted budget cuts.
“I’d say, from the Democrats’ perspective, if we consider increases in sales tax, whether a gas or tobacco tax, it needs to be coupled in some fashion with sales tax relief on food,” said Rep. John Carmichael, D-Wichita.
In 2015, the Republican-led Legislature and Brownback agreed to increase the statewide sales tax to 6.5 percent and make no distinction for food purchases as has been common in other states. The tax hike during a lengthy legislative session was taken to close a deficit in the previous fiscal year’s budget.
Income tax target
Sen. Jeff Longbine, the Emporia Republican selected by his peers to be the Senate’s new vice president, said a gasoline tax hike could gain traction among lawmakers, but the state tax on tobacco products likely reached the viable upper limit. The idea of selling off a portion of future annual tobacco settlement payments to Kansas would be “a loser, in my opinion,” Longbine said.
He said modification of individual income tax rates could be part of a deal to address the structural imbalance in the state’s revenue stream.
“Either a new bracket or an increase in the current upper bracket,” Longbine said. “You don’t have to move it very far to make a huge difference.”
Outgoing House Speaker Ray Merrick, a Stilwell Republican who didn’t seek re-election, said root of the state government’s budget problem centered on an inability to sufficiently restrict spending. When personal and business taxes were slashed, he said, there wasn’t political will to reduce expenditures by a commensurate amount. The 2017 Legislature needs to come to grips with that reality, he said.
“I’ve been saying that for years,” Merrick said. “It’s a spending problem, not a revenue problem.”
However, it the shortfall were covered exclusively with spending cuts, the across-the-board hit would be approximately 12 percent.
Sen. Jim Denning, R-Overland Park, said he was convinced Brownback wouldn’t veto legislation repealing the business tax break largely exploited by farmers, physicians, lawyers and others operating limited liability companies. Polling in Kansas and outcome of the 2016 election suggests Kansas voters don’t think the LLC exemption to be fair or to have significantly boosted the economy.
This tax reform would generate about $250 million annually for the state, but that revenue wouldn’t be available to the state until 2018.
Denning, who will become Senate majority leader, said spending reductions and, perhaps, a 5 cent gasoline tax hike would be part of the agenda to move state government “out of this crisis mode.”
Read more from the Topeka Capital Journal here.