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WSU economists forecast flat job growth in Kansas in 2017; state-led recession 'potentially around the corner'

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Economists at Wichita State University released a new economic forecast for Kansas on Wednesday, saying they expect employment to grow only half a percent in 2017.

"Unlike the U.S. economy, the Kansas economy may have reached its peak,” said Jeremy Hill, director of WSU's Center for Economic Development and Business Research, which published the report. “There are now multiple signs of an economy that is losing steam. Although the forecast calls for employment growth at half of the rate over the past five years, increased caution should be added as a state-led recession is potentially around the corner.”

That would be disappointing on many levels, most notably among people out there looking for jobs. But it's also a dark omen for the Kansas Legislature, which needs to put together a tax package that can produce revenues that grow over time in order to fund regular increases to public schools.

Here's the first problem: The state of Kansas gets the bulk of all the money it spends from three sources of revenue: income taxes, both individual and corporate; sales taxes; and property taxes.

Nearly all of the property taxes that the state raises, the statewide 20-mill levy, goes directly to public schools. And in the last fiscal year, income and sales taxes accounted for 85 percent of all the other taxes the state collected for its general fund.

Here's the second problem: None of those revenue sources has been growing at the kind of rate needed to sustain long-term growth in the cost of government services, particularly education services.

The WSU report came out the same day that the Pew Charitable Trusts issued a report showing that total revenue in most states dipped in the second and third quarters of 2016, but still exceeded their pre-Great Recession peaks. But as the chart below shows, total revenue in Kansas has never caught up to that peak set in the first quarter of 2008.

Chart showing percentage change in quarterly state revenues compared to pre-recession peak, Kansas vs. 50-state total. Source: Pew Charitable Trusts.

Chart showing percentage change in quarterly state revenues compared to pre-recession peak, Kansas vs. 50-state total. Source: Pew Charitable Trusts. by Peter Hancock

State budget officials have been telling lawmakers for months that sales taxes have been basically flat for the last couple of years and are expected to remain flat into the foreseeable future.

That's due to a lot of things — people avoiding sales taxes by shopping online or across the state border; and general "deflation" in the price of consumer goods that the state levies its sales tax on, which in turn is probably due to the increasingly global nature of the world's economy and the outsourcing of manufacturing to low-wage countries.

That's one of the reasons that Sen. Jim Denning, R-Overland Park, cited Wednesday when he proposed levying a fee on monthly utility bills. But even if that were to pass, that too is a revenue stream that will only grow as the population grows, and that's something else that's been kind of stagnant in Kansas.

But it's also the reason why lawmakers are now considering extending the sales tax to certain parts of the service sector, the one fastest growing sector of the economy, and the sector that WSU says will outpace all the others in job growth this year.

Meanwhile, according to data from the Kansas Department of Revenue's Property Valuation Division, assessed real estate values in Kansas have grown only about 3 percent a year, on average, for the last three years. That is, however, an improvement over the 1.3 percent growth in 2013 and 0.6 percent growth in 2012.

Much of that growth, it should be noted has been attributable to Johnson and Douglas counties. Most of the rest of Kansas has seen flat or declining property value, especially in rural areas where oil and gas production account for a large part of their property valuation base.

So, absent any kind of real estate "boom" on the horizon, which appears unlikely, or a reversal in the downward trend in the price of consumer goods, which is also unlikely, Kansas needs steady and sustained growth in the one major revenue stream left: income taxes.

And that's why the WSU forecast, if accurate, portends problems for state government.

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