Revenue looks better than expected. Don’t mess with it!

Duane Goossen
April 24, 2018

Kansas revenue estimators have revised the official forecast of FY 2018 and FY 2019 general fund revenue … upward! The new forecast should smooth the way for a quick conclusion to the 2018 legislative session, as lawmakers work to finish a budget and achieve adequate funding for public education.

Individual income tax collections are the big news. The estimators now predict that individual income tax revenue will be more than $800 million higher in FY 2018 (July 1, 2017, to June 30, 2018) than the previous fiscal year.  The chart below tracks a seven-year trajectory of income tax collections in Kansas. The income tax cuts passed in 2012 first began affecting revenue in FY 2013. Then in FY 2014 — the first full fiscal year of implementation — income tax revenue plummeted. In 2017, lawmakers reversed much of the “Kansas experiment,” bringing income tax revenue back up in FY 2018.

The major loss of revenue that Kansas experienced from FY 2014 through FY 2017 caused a multi-year budget crisis. Tax cuts brought revenue down. Reversing the tax cuts restored revenue.

Uncertainty remains high. The Kansas Dept. of Revenue never had a good grip on the cost of the 2012 tax cuts, and so it has been unable to assess the effect of the tax cut reversal with much precision. Additionally, the interaction of federal tax reform with Kansas tax policy further compounds the uncertainty of estimate. Federal tax reform may have caused some taxpayers to prepay a portion of their state tax bill, adding to Kansas collections in FY 2018.  And if a higher federal standard deduction entices fewer Kansas taxpayers to itemize deductions next year, that could add to Kansas income tax receipts in the future. The April income tax filing deadline has passed and most returns have been filed, but much analysis remains to be done.

Now is not the time to cut taxes. Happily, better-than-expected revenue means that at least the first two years of a five-year school finance bill can likely be implemented without a bill to increase revenue, and ending balance amounts can be built up to more normal levels.

But remember, less than a year ago, Kansas was mired in a deep multi-year budget crisis. The passage of SB 30 last June, which reversed the tax experiment, brought the state out of crisis, but there are still many other steps to take before Kansas regains financial health. Kansas continues to take hundreds of millions of dollars each year out of the highway fund. KPERS payments have been delayed. Agency budgets need to be repaired. The recently passed school finance bill has not cleared the Supreme Court and may require more dollars. The state’s rainy day fund is at zero.

Unbelievably, earlier in April, the Kansas Senate debated and passed an income tax cut bill. This is certainly not the time to cut any part of the state revenue stream. Should a time come when it is prudent to consider tax cuts, the sales tax on food should be at the top of the list for consideration, not income taxes.

The updated revenue estimate gives hope for improved financial times, but proceed cautiously, lawmakers. Don’t undo what took so much political dedication to fix.

Duane Goossen is the Kansas Center for Economic Growth’s senior fellow.

ClayRevenue looks better than expected. Don’t mess with it!