State revenue estimates increased $525 million over two years. What does that mean for schools?

State budget and tax experts said Thursday the Kansas state general fund should take in $220 million more than earlier expectations in the current fiscal year ending June 30, 2020, and $305 million more next year. Here is the update. 

Consensus Revenue Estimates are updated by Legislative Research staff, the Budget Division and Department of Revenue, and university economists in April and November. The Governor uses the November estimate to develop budget recommendations to the Legislative session beginning in January. The Legislature uses the April estimate to adopt a budget. 

The new estimate dramatically changes the state general fund (SGF) outlook following the school finance plan adopted in response to the Gannon school finance case. Previous budget projects, such as presented to Governor Kelly’s Tax Reform Council, showed the SGF with a $480 million deficit in FY 2023, the final year of the six-year Gannon plan, which was designed to restore school operating budgets to 2009 inflation-adjusted levels and approved by the Kansas Supreme Court in June. 

That deficit was projected because the state is expected to add approximately $100 million in base school funding, $20 million in school pension payments, and $80 million in human service caseloads every year. At the same time, the state is trying to phase-out nearly $250 million in transfers from the state highway fund into the state general fund. The April 2019 CRE indicated that tax revenues would increase at less than $150 million per year, around 1.9 percent. 

As a result, the SGF ending balance was expected to drop from $1.1 billion in 2019 to $303 million in 2021 and fall into deficit in 2022 as the spending exceeded revenues. 

The new estimates only cover the current fiscal year, 2020, and next year, 2021. State tax revenues are now expected to increase $229 million in FY 2020 and $232 million in FY 2021, or about 3 percent per year, leaving an ending balance of $722 million in FY 2021. 

Because the additional revenue increases the ending balance in those two years and creates a higher “base” for tax revenue growth over the following two years, it makes the current budget plan, with restored school funding, much more sustainable. 

That doesn’t mean the new revenue is guaranteed. First, the new estimates are based on modest, sustained economic growth. A national or state recession could result in much lower revenue growth than expected. 

Second, despite concerns by some Legislators and advocates about the future deficit, the new estimates will likely renew calls for tax cuts. Experts say approximately $60 million annually in new revenue is due to the fact that some Kansans can no longer itemize certain tax deductions as a result of changes in federal tax law. There will be calls to use the expected new revenue to cut individual and business taxes. 

Third, current budget projections do not include any additional spending on other state programs. There are expected to be efforts to increase funding on early childhood programs, on higher education, and on mental health and other social services. 

Any of these circumstances – a downturn in the state economy and tax collections, tax cuts or higher spending in other areas – could make it more difficult for the state to fully implement the Gannon funding plan over the final three years (FY 2020 through 2023). 

Most of the increased revenue estimate was due to the individual income tax, which was increased $160 million in 2020 and $215 million in 2021. Sales tax collections were expected to rise $50 million more than the April estimate in 2020 and $70 million more in 2021. However, severance tax and insurance premiums and corporate franchise tax estimates were lowered. 

Although tax estimates were raised, the estimated increase in Kansas personal income, the total annual income of all state residents, was lowered from 3.9 percent each year for 2019, 2020 and 2021 to 3.6 percent each year. National personal income growth was also lowered but remains higher than Kansas; from 4.1 percent, 4.0 percent and 3.9 percent to 3.9 percent, 4.0 percent and 3.8 percent. 

The estimated inflation rate was lowered from 1.9 percent to 1.7 percent in 2019 and left unchanged at 2.1 percent for 2020 and 2021. 

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