TOPEKA — Gov. Laura Kelly’s financial advisers poured cold water on a tax plan passed by the Legislature, saying it would contribute to a billion-dollar deficit in the next fiscal year.
The tenuous financial forecast reflects a package of tax reforms that add up to a $285 million reduction in annual state revenue, an unexpected $359 million loss in revenue because of tax exemptions for $6.6 billion that flowed to businesses from federal Paycheck Protection Program, and the absence of a statewide 20-mill levy that generates $725 million for public school funding.
Competing budgets feature a $125 million ending balance in the House plan or $296 million in the Senate plan for the fiscal year that begins July 1. Both budgets include reductions in K-12 funding that could land the state back before the Kansas Supreme Court if not revised.
Shifting revenue forecasts for an economy recovering from the pandemic leave some uncertainty in the budget outlook, as do the strings attached to a new round of federal relief funds that can’t be used to offset tax cuts.
The governor’s budget director, the secretary of the Kansas Department of Revenue, and members of the governor’s tax council raised concerns about the financial picture in a meeting on Friday. Their assessment provides cover for the governor if she chooses to veto the tax plan.
“We must continue practicing fiscal responsibility — particularly as we’re getting a clearer picture of how federal and state tax legislation could impact the state’s ending balance,” Kelly said last week.
The governor in past sessions refused to sign legislation that offers tax breaks to large, multinational corporations. This year, the Legislature balanced those tax cuts with provisions requested by Kelly to apply sales tax to digital goods and online out-of-state retailers, also known as marketplace facilitators.
Sen. Caryn Tyson, a Republican from Parker, has pursued corporate tax breaks for several years, following the 2017 changes in federal tax code. She said it was past time to enact state-level tax reform, and revenues are trending up.
“Tell them to decrease their spending,” Tyson said. “If the administration wants the marketplace facilitator, then she should sign the bill. It’s good legislation.”
Revenue secretary Mark Burghart told the tax council that the Legislature abided by the Kansas Chamber demands to exempt the first $100,000 in online out-of-state sales from tax collections, deflating the potential gain in revenue by $9.1 million. He said the sales tax exemption would benefit 9,000 small, remote sellers. Meanwhile, 30,000 merchants in Kansas have less than $100,000 in annual sales but pay $46 million in taxes.
“Kansas merchants have been waiting for over 50 years to level the playing field between in-state and out-of-state companies,” Burghart said.
The tax break for foreign-sourced income only benefits the largest companies, he said. Of the 30,000 corporations in Kansas, 750 pay 90% of the corporate income tax collections.
Adam Proffitt, the state’s budget director, said the budgets that passed both chambers include “quite a bit of new spending.” Most of the expansion will go toward social services, he said.
“It’s not that it’s bad policy,” Proffitt said. “It’s just that we didn’t have the room in the budget to start with this year to add all these things.”
He also said the governor remains steadfast in her commitment to fully fund public schools. The House budget includes a 2% across-the-board spending reduction, and the Senate budget would replace state dollars with one-time federal aid, a move that could cause the U.S. Treasury to claw back funding.
“One of the key issues really is we’re waiting on the feds, because the feds haven’t given definitive guidelines on how funding can be used,” said Sen. Molly Baumgardner, a Republican from Louisburg who chairs the Senate Education Committee. “Take it aside from just education — I think our cities, our counties and our state is certainly looking for what is it that we can use these funds for.”
The statewide property tax traditionally used to fund public schools was removed from separate legislation. Chris Courtwright, a tax council member and former principal economist for the Kansas Legislative Research Department, said lawmakers appears to be holding the 20-mill levy hostage in exchange for tax credits that benefit private schools.
Proffitt raised additional concerns with the proposed 2% cut in the House budget, because it would apply to areas of government where the state gets matching federal funds.