Tax reform council begins work with sobering budget projections

Gov. Laura Kelly’s Tax Reform Council convened its first meeting Tuesday with deep background briefings on state sales and income tax policies, budget projections, and economic updates. One highlight: current budget trends and modest forecasts in state revenue growth show a $482.5 million state general fund deficit in FY 2022-23, a shortfall of 5.8 percent. 

The council will continue meeting Wednesday, and October, November and December before submitting an interim report to the 2020 Kansas Legislature. It is expected to pick up work next summer to prepare a final report to the 2021 Legislature. That work will take place during the 2020 general election cycle, when all 165 seats in the Legislature are on the ballot. 

The council was formed by this executive order in September. Committee members were announced in this media release. Here is a link to this month’s meeting agenda and background materials. 

Kelly welcomed the group Tuesday touting its bipartisan character. It is co-chaired by two previous long-serving state senators, former Senate President Steven Morris, R-Hugoton, and Senator Janis Lee, D-Kensington, who served as ranking Democrat on the Senate Tax and Education Committees, with a stint as hearing officer for Kansas State Board of Tax Appeals. (Both also previously served as local school board members.) 

Also appointed by Democrat Kelly were former Republican House member and Budget Director Duane Goossen and former Republican Senator Audrey Langworthy, who chaired the Senate Assessment and Taxation Committee. The two current Democratic leaders in the Legislature, Senate Minority Leader Anthony Hensley, D-Topeka, and House Minority Leader Tom Sawyer, D-Wichita, are serving on the committee. Republican leaders Senate President Susan Wagle, R-Wichita, and Speaker of the House Ron Ryckman, R-Olathe, declined the governor’s invitation to serve. 

Other members include representatives of local governments, including KASB President Shannon Kimball, Lawrence USD 497, and representatives of business, economic development, agriculture and children’s advocacy groups. 

Here are some of the highlights of the council’s first day. 

In 2012, Kansas state income tax rates were cut under the plan signed by Gov. Sam Brownback, deeply cutting state revenues. Although those tax cuts were partially restored, state income tax rates in all three brackets remain lower than they were in 2012. However, the state sales tax rate, which was scheduled to drop from 6.15 to 5.7 percent in 2013, was set at 6.15 percent in 2013; raised in raise to 6.5 percent in 2015 and remains at that level. 

The state general fund is expected to end the current fiscal year (2020) with an ending balance of $677.1 million, or 8.6 percent. Over the next three years, state general fund spending is projected to rise at least $200 million each year for three major purposes: implementing the school finance plan to address the Supreme Court’s Gannon decision; higher human services caseloads; and higher pension contributions for school employees to make up for past underfunding. 

However, state tax revenues are expected to increase only about $150 million per year under the current tax structure, and the state is trying to eliminate over $200 million annually in transfers from the state highway fund. As a result, the state general fund declines from a $677.1 million surplus to a $483.5 million deficit. 

Another cost to the state is a variety of economic development incentives, which reduce state revenues through targeted tax cuts or rebates for projects designed to create new business activity. Commerce Secretary David Toland said those programs are critical to make Kansas competitive, especially after cuts in business recruitment staff. 

When state income tax cuts reduced state revenues from 2013 to 2017, Brownback and the the Legislature shifted about $2 billion from planned state transportation funding to avoid deeper spending cuts in programs like K-12 education. That reduced funding for both road maintenance and new projects. 

Over the past year, Kansas private sector employment has been growing and the state is at near record low unemployment, slightly below the U.S. average, and unemployment claims are also at historical lows. The biggest challenge now, suggested several agency leaders, is not creating more jobs but finding workers to fill existing jobs. Kansas labor force participation – the percentage of the population working or looking for work, has been trending down since 2009, although it is still higher than the U.S. average. 

On Wednesday, the committee will look at property tax policies, taxing internet sales, and an academic review of research on tax policies. 

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