Kansas tax plan caps future revenue, spending growth with ‘ratchet’ provision
Topeka ? After a record-breaking marathon session this year, Kansas lawmakers passed a budget package that provides essentially flat funding for K-12 and higher education, and no provision for state employee pay raises for the next two years.
That was largely the result of a huge revenue shortfall, which some people blame on the massive income tax cuts that Republican Gov. Sam Brownback championed in 2012, but which Brownback and his supporters attribute to a sluggish national economy.
However, included in the budget and tax package signed this year is a provision that, according to some officials, virtually assures that Kansas will continue to face tight budgets and revenue shortfalls far into the future, long after Brownback leaves the governor’s office in 2019.
It’s known in legislative jargon as the “ratchet” provision because it’s a formula that uses future revenue growth above a certain limit to ratchet down state income tax rates. It also has been characterized as the “march to zero” because, if it works as intended, it eventually will phase out all state income taxes.
“It effectively eliminates any increases in spending,” said Sen. Tom Holland, D-Baldwin City, the ranking Democrat on the Senate tax committee.
Priority on tax cuts
The ratchet provision in this year’s tax bill is actually a modified version of the one passed as part of the original income tax cuts enacted in 2012.
The original law said that starting in fiscal year 2018, any time state revenues grow more than 2 percent from one year to the next, income tax rates automatically would be lowered for the following year by an equal amount.
That became one of the central sticking points in the tax debates in this year’s record 113-day legislative session. While many lawmakers wanted to repeal that provision or at least delay it for several years to prevent another budget crisis two years down the road, many conservatives, backed by the Kansas Chamber, resisted making any changes to the law.
In the end, lawmakers agreed on two minor changes: delaying the ratchet for two years, until fiscal year 2020, and allowing for 2.5 percent growth, plus mandatory increases in the cost of Kansas Public Employees Retirement System contributions.
“It was devised to provide for some future tax relief, only when revenue warranted it,” said Rep. Marvin Kleeb, R-Overland Park, who chairs the House Taxation Committee. “Of course, if revenue growth is really significant in the future, the Legislature could accelerate future tax decreases if they wanted.”
Limiting spending options
An earlier version that did not pass also would have allowed for increases in the cost of Medicaid reimbursements before imposing the 2.5 percent cap. Conservatives said that would have provided too large of a loophole.
But without the exclusion for Medicaid cost increases, some now fear that Medicaid alone could consume most, if not all, of the 2.5 percent cap on revenue growth.
According to the most recent estimates, Kansas expects to receive just over $5.7 billion in revenue in the upcoming fiscal year. If the 2.5 percent cap were applied then, it would limit growth the following year to just $142.8 million.
According to the Kansas Department of Health and Environment, Medicaid costs have grown more than 4 percent each of the past two years.
Holland said if those trends continue, the 2.5 percent cap imposed by the ratchet provision would sharply limit any possibility for future increases in education funding or spending on any other state programs.
“The other problem I have with this is, the ratchet presumes the current spending level is appropriate,” Holland said. “We don’t have enough revenues coming in the door to meet our budget needs. And with the state’s largest tax increase (a reference to this year’s tax bills), our ending balances are still really short. It just keeps us in this myth that we want to continue the path to zero.”
Brownback’s budget director Shawn Sullivan, however, said he thinks the 2.5 percent cap gives the state enough flexibility.
“I think we’re going to do everything we can to lower the growth in the Medicaid program,” he said. “We’ve been doing that the last couple of years through managed care. I would anticipate that when there’s a limit, much of that (spending) growth would be due to K-12 (education) and Medicaid. For the last two years, state general fund growth has only been about 1.5 percent.”
Kleeb noted that future legislatures can always change, or even remove the cap, if circumstances change.
“The current Legislature is not able to bind future Legislatures,” he said. “If, in the future, Medicaid growth becomes a lot worse, or if there are some other cost drivers out there, the Legislature will want to change the ratchet. All it takes is a majority vote in the Legislature and a signature by the governor, and all of a sudden the ratchet is adjusted.”