Wrapping up the session

When Kansas legislators return to the Statehouse this week to start the wrap-up session and begin finalizing the state budget, they will be facing the rosiest financial outlook they have seen in many years.

The economy is rebounding, which means more taxes have been collected than expected and state economists have forecast continued growth in the months ahead.

Meanwhile, many cuts to services made in response to the recession that hit the nation and Kansas starting in 2007 remain in place. In short, the state’s expenses have remained relatively flat while its revenues have grown.

The result could be an almost $600 million surplus or ending balance for the coming fiscal year, just as Gov. Sam Brownback called for in his January State of the State speech.

But it is an election year and the urge to cut taxes is strong. That means legislators also face a scenario in which that $600 million cushion forecast for the coming fiscal year vanishes within months to be replaced by a $700 million or deeper shortfall, a crater as big as Kansas government faced at the bottom of the recession.

How could the Kansas ledger book move from strong black to deep red in the course of a year?

Final approval of either of the two big tax bills already passed in the House and Senate would do it, though the Senate’s tax measure would dig the deeper hole.

Heading into break last month, the Senate by a wide margin passed a tax plan that among other things would drop the top individual income tax rate from its current 6.45 percent to 4.9 percent and exempt the earnings of most small businesses. It also preserved a number of popular tax credits that Gov. Sam Brownback proposed eliminating to offset part of the cost of his own plan for eliminating the state income tax. (Both chambers blew past the governor’s tax plan, embracing or modifying some of his proposed cuts while mostly ignoring his proposed elimination of popular tax credits, including the mortgage deduction.)

‘That’s a big number’

The Senate bill’s estimated net cost to the state treasury in the fiscal year that starts July 1, 2013, would be $829 million, costing the state more than $3.7 billion in lost tax revenue by fiscal 2017.

Or as House Appropriations Chairman Marc Rhoades, a Newton Republican, put it:

“The Senate tax bill — that’s a big bill. I mean, that’s a big number.”

With that important detail now sinking in, even some senators who voted for the tax plan in Senate Substitute for House Bill 2117 have concluded it was a bad idea. Some at the Statehouse are calling it a fiscal nightmare waiting to happen.

In the nightmare, described vividly to KHI News Service by a legislative staffer, some Tea Party backbencher in the House jumps up and makes a motion to concur with the Senate bill and there aren’t enough votes to stop it passing. The bill then goes straight to Gov. Sam Brownback for signature.

Most consider that the least likely scenario to play out, though procedurally and even politically it or some approximation could happen.

“How can you predict with something like that? I would hope that wouldn’t happen,” said Rep. Sharon Schwartz, an old-school conservative Republican from rural Washington County and former chair of the House Appropriations Committee. “I would hate to have tell folks (in her district after the session) that we did some things that are going to cause us to have to come back next year and raise your taxes” to dig the state back out of a new budget hole.

Only joking

Some House members have talked about making a motion to concur, which has helped fan the scare.

But “that was just a joke,” said Rep. Jim Denning, an Overland Park Republican and a member of the House freshman caucus, which some lobbyists have nicknamed the Tea Party Caucus.

Denning said he would be pleased to see final budget and tax bills that provide some tax relief, add a little money for some programs, leave the state with reserves between $200 million and $300 million in both fiscal years 2013 and 2014, and stem the growth in state spending that typically comes with the climb out of an economic downturn.

“We have to have some money in the bank,” Denning said. “That’s my personal view, but I’m telling you what I hear in the hallways, as well.”

Reaching that complicated sweet spot could take a lot of effort in the wrap-up session.

Sen. Carolyn McGinn, the Sedgwick Republican who chairs the Senate Ways and Means Committee, has started pushing a counterproposal to the House and Senate tax bills.

Her committee has Senate Substitute for House Bill 2241, which would send state dollars to local taxing districts that do offsetting reductions in property taxes. The state already provides some local property tax relief through the Local Ad Valorem Tax Relief Fund, but the bill would change the formula so that the local units could get more money in fiscal years 2013 and 2014 in exchange for less in later years. Other parts of the plan include $77 million in spending increases for local schools and about $43 million for social service caseloads.

Alternatives

“There’s certainly another option there,” McGinn said, describing the counterproposal. “The Senate has passed some relief for local property taxes, which would be about $18 million (more) for those folks back home in the local government area. It also added some funding for education to offset some of the cuts they have received. We have to fix KPERS (the state employees’ pension fund). If you did all those things in addition to allowing the sales tax (increase passed in 2010) to sunset, we would have an almost 10 percent ending balance and our budget would look very good. So there are a lot of things we can do and accomplish this year and still have a good ending balance.”

The House doesn’t yet have an alternative plan, though there also is buyers’ remorse with the tax bill it passed.

The House tax plan would be less costly to state coffers than the one passed in the Senate. In fiscal 2014, it would leave the state general fund under water by about $428 million with a projected five-year cost of $1.4 billion.

It would reduce individual income tax rates in each of the three brackets over time, but it also would eliminate the current sales tax on food purchases. That piece alone would cost the treasury between $267 million and $298 million in each of the coming five years.

Schwartz said property taxes, not those on income, are the concern in her district and she’d like to see any tax relief focused on that category.

“People aren’t complaining about income taxes.” she said. “Usually, they’re just glad when they have some income to pay tax on. It’s the property taxes that are hurting.”

But all that remains undecided.

“I think there’s a whole lot more discussion in conference committee that’s going to have to take place on the tax piece,” Rhoades said. “I certainly want a tax plan. I want to do that and have an ending balance. That’s the question. What’s the number the House can live with on what the tax bill does and what the ending balance is. At least from the House perspective, I don’t know that we know what that is yet.”