••• Tax & Spending •••

Kansas House passes $2.4 billion income tax increase

After the November election, we said the 2017 Legislature would be defined by broken promises – either not being willing to pass the enormous tax increases to fund the vote-for-me promises or the implied promise to just raising taxes on small businesses.  Now we know that the majority of the Kansas House of Representatives intends to slap citizens with a $1.46 billion income tax increase over the next five years, in addition to a $967 million increase on small business.

By a margin of 76-48, the House passed legislation to significantly increase marginal rates, eliminate the gradual phase-out of income taxes and eliminate the exemption on pass-through income for small business.  To add insult to injury, they made it all retroactive to January 1, 2017 and they did so knowing that only 4 percent of Kansans said an income tax hike on citizens was the best way to balance the budget.

The increase for FY 2018 is higher than later years because of the ‘catch-up’ nature of retro-activity; if passed by the Senate and signed into by the Governor, it would take effect on July 1.  Citizens and businesses would have to make payments for taxes due from earnings in the first half of 2017 in the last 6 months the year or get a very nasty surprise when they file their tax return for 2017.

Marginal tax rates would increase on all taxpayers under the plan.  The bottom bracket (up to $15,000 Single / $30,000 Married) is taxed at 2.7% in 2017 but was scheduled to drop to 2.6 percent next year.  Current law taxes all income above those levels at 4.6 percent but the House measure adds a bracket.  The rate on taxable income between $15,000 and $50,000 (Single) would jump 14 percent to 5.25 percent and the rate on taxable income above $50,000 would jump 18 percent to 5.45 percent.  The same rate hikes apply to married filers at double the taxable income levels.

The budget can be balanced without an income tax increase or any other tax increase if legislators are willing to make government operate more efficiently and use other resources.  The table below is a modified version of the Governor’s Budget Proposal.  It uses the Governor’s budget proposals except for the KPERS changes and his tax increases. We also add our recommended use of school cash reserves, performance-based budget savings, the actual revenue variance above estimates for November through January and assumes a similar positive variance for the last five months.

To arrive at the excess school cash reserves, we calculate each district’s operating cash reserves (excluding federal, capital and debt) as of July 1 2016 as a percentage of its operating costs (total less capital and debt) for the 2016 school year.  The amounts of operating cash reserves in excess of 15% of operating expense across all districts totaled $196.5 million for the 2016 school year.  Our calculation of operating cost excludes any Capital Outlay that was allocated to Instruction or other operating costs (since we exclude Capital Outlay carryover funds) but federal spending is still layered through operating costs; removing federal operating costs would produce a higher carryover ratio since the denominator would be reduced and therefore result in more carryover reserves being ‘swept’ next year.  One might consider that a hedge against unknown changes for the 2017 school year.  There are other ways to do the calculation of course (e.g., excluding funds in Gifts & Grants) but the process is the same…reflecting the percentage of carryover funds at the beginning of the year as a percentage of the expenditures out of those funds for the year.

The estimated savings from the performance-based budget review is roughly 3 percent of non-K12 expenditures.

For some legislators, this broken promise still isn’t enough.  Representative Melissa Rooker told the House K-12 Budget Committee that the $965 million school funding increase she and Senator Laura Kelly are proposing would require even more tax increases.