Kansas sits on a massive influx in taxpayer cash. By June, the state’s ending balance is expected to hold a $3 billion surplus as monthly tax revenues continually exceed expectations. On top of this, the state also has its second round of federal ARPA relief funds hitting coffers in May. Kansas isn’t unique in this regard though: the initial fears of COVID-induced revenue shortfalls never came true, yet the Feds showered money on the state. High balances are the norm everywhere.
The Sunflower State has some key opportunities to responsibly spend this money by providing relief to taxpayers while not expanding government. Increased federal government spending through the pandemic combined with a recovering economy is also driving dramatic increases in inflation.
Given these reserves across the country, it isn’t surprising that some states across the country are considering tax reductions. This isn’t a partisan matter either: it’s good policy approaching the surplus with the idea of returning money to taxpayers, not spending more. Indeed, and despite being known for high taxes, New York is planning on a $2.2 billion property tax rebate from their $5 billion cash pile. In Kansas, this debate is headlined by Governor Laura’s Kelly push to end the food sales tax. The key things to tax relief are:
1. Spending cannot exceed revenue. One of the key lessons from the “Brownback Experiment” was that spending cannot exceed revenue. This cannot be done with assumptions and accounting games. Much of the state budget – K-12 spending driven by Supreme Court rulings – was functionally beyond the control of the elected branches of government. Without getting into the competing constitutional claims about K-12 finance, see link above, this made it very difficult for the legislature and then-Gov. Brownback to establish long-term fiscal stability post-2012 tax cuts. So, because spending didn’t go down (and instead increased), deficits arose, leading to the largest tax hike in state history in 2017. Regardless of whether a tax cut is financed currently by a surplus, quickly offering billions of dollars without considering the long-term balance of revenue and spending leads to unstable and risky governing.
2. Prioritize long-term relief. An OECD study reports that after corporate income taxes, personal income taxes are the second most harmful tax to economic growth. Small rate reductions to personal income taxes in Kansas could result in as much, if not, more savings for families as the proposed food sales tax cut But more than that, targeting tax reductions affect Kansas’ business environment as a whole could help draw more people to the state. What’s more, by providing more economic opportunities through a robust job market it would help the very low-income folks at whom the food sales tax reduction is aimed. Currently, Kansas has the highest effective tax rates on mature tech businesses. A multi-billion-dollar handout like SB 347 may bring those businesses here, but they won’t stay unless taxes change or until they get a better deal from some other jurisdiction.
One of the biggest challenges during the pandemic was the increase in unemployment and thus the larger burden of unemployment benefits of states to support workers. ARPA can be used to refill state unemployment insurance trust funds. This is a way to top off Kansas’ system in a way that doesn’t expand spending while at the same time making the state’s safety net more stable and general fund money available elsewhere. As of December 1st, 2021, Kansas’ UI trust fund is down about $200 million from its January 2020 level. This move would also prevent interest from growing on the lost money.
Kansas should cautiously replenish its existing programs rather than expand these efforts because of maintenance of effort conditions in ARPA. If a state chooses to increase its unemployment funding through ARPA, then the maintenance of effort conditions dictate that the state has to keep that same increased level of funding into the near future (with or without federal support). ARPA’s maintenance of effort conditions also applies to education funding.
Since the Brownback years, the rhetoric of fiscal stability has been little more than a political football. Each side uses it to serve their political ends. Too often, deficits are used to justify short-term decision-making and Kansas is subject to a boom-and-bust budgeting cycle. There is no silver lining to COVID but the current budget surpluses provide what may be a once-in-a-generation opportunity to truly stabilize Kansas’ books. The question remains whether Topeka will have the discipline to use the surpluses prudently – KPERS, unemployment, Rainy Day, long-term tax relief – or do so recklessly – massive incentive packages, one-time rebates, increases in ongoing spending.