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Kansas Tax Cuts Prompt Caution on Revenue Shortfall

DALLAS – A combination of income tax cuts and the looming demise of a sales tax increase will leave Kansas with a $327 million revenue shortfall in fiscal 2014, according to a forecast adopted by the state’s official Revenue Estimating Conference late Tuesday.

The estimate for general fund revenues of $5.46 billion in 2014 is $705 million less than expected in fiscal 2013.  The panel also adopted a revised estimate for 2013 revenues of $6.2 billion, down slightly from April’s estimate and 4% less than collected in fiscal 2012.

A surplus of more than $470 million is expected at the end of fiscal 2013 on June 30.

The official outlook will be used by Gov. Sam Brownback to develop the proposed budget for fiscal 2014. The panel includes university economists, legislative budget staff, Department of Revenue executives, and Brownback budget officials.

Revenue in fiscal 2014 will drop by $425 million due to revisions by the 2012 Legislature to eliminate the non-wage tax liability on 190,000 businesses and reduce the top income tax rate to 4.9% from 6.45%.  The new rates go into effect Jan. 1.

Another $262 million in sales tax revenue will be lost when the state sales-tax rate falls to 5.7% from 6.3% on July 1.

The sales rate was raised temporarily from 5.3% by the 2010 Legislature as revenues dropped. A 0.4% increase will become permanent to fund transportation efforts.

Brownback said in October he would consider extending the sales tax increase for another year or two until revenues can recover. He said the income tax cuts will boost the state’s economy and tax revenues by then.

Raney Gilliland, director of the Kansas Legislative Research Department, said the Kansas economy is healthy but anemic.

“The group does believe we do have a somewhat rebounding housing market and some indication of stronger consumer confidence,” he said. “We’re still growing out of the Great Recession. However, that growth remains slow, not just for the U.S. but, in addition, for Kansas.”

The official prediction for fiscal 2014 calls for income tax revenues of $2.8 billion and $2 billion from the state sales tax.

Steve Anderson, the governor’s budget director, said the shortfall would be eliminated through budget cuts rather than revenue increases.

"I think the governor will have a budget that keeps K-through-12 [education] properly funded, that covers all essential services just as he has promised,” Anderson said.

He said agencies have been asked to propose budgets with a 10% spending reduction in fiscal 2014, although the cuts probably would not be that severe.

“We’ll be in far better shape than most think,” he said. “We would continue pruning government even if we didn't have this issue."

The prediction of a $327 million shortfall would require budget cuts of 5.3% from current spending levels, Anderson said.

Senate Minority Leader Anthony Hensley, D-Topeka, said the revised revenue forecast was released Tuesday afternoon to keep it from becoming an issue in the election. He called it a “self-imposed budget crisis.”

The makeup of the  Kansas Legislature is as it was before Tuesday’s election, with 32 Republicans in the 40-member Senate and 92 in the 125-member House. However, several moderate Republican incumbents lost primary fights with more conservative challengers.

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