By Bryan Lowry 
January 11, 2017 

Gov. Sam Brownback wants to increase alcohol and tobacco taxes and take more money from the highway fund to help avert a projected shortfall of more than $900 million over 18 months.

He also wants to liquidate a long-term investment fund and sell off the state’s future proceeds from a settlement with tobacco companies to get cash now.

But he wants to preserve a key income tax exemption for certain businesses that a growing number of lawmakers seek to repeal.

Budget director Shawn Sullivan called the package of tax increases, fund transfers and budget cuts unveiled Wednesday a reasonable proposal, though he joking termed it “the lobbyist job protection act,” anticipating the fight it could generate.

“There are several difficult pieces of this budget…the problem is if you take those things away what you’re left with are huge spending cuts or huge tax increases,” Sullivan said.

Lawmakers appeared skeptical.

“The governor continues to use one-time money, adds new taxes on the middle class, and neglects to fix the LLC loophole. The math simply just doesn’t add up. The solution will require a combination of cuts and changes to tax policy,” the Republican leaders of the Senate said in a statement Wednesday evening.

“We expect to debate alternative proposals. … We cannot kick this can down the road any longer,” the statement said.

Sen. Laura Kelly of Topeka, the ranking Democrat on the Senate’s budget committee, said the budget was based on “pie-in-the-sky assumptions. … So yeah, I think it’s the worst budget I’ve ever seen.”

Senate Majority Leader Jim Denning, an Overland Park Republican, said the Senate probably would look for deeper budget cuts than the governor proposed.

Tax increases

The governor wants to increase taxes by $377 million over two years.

He would double the tax on liquor in July to 16 percent and increase the tax on cigarettes by a dollar a pack to $2.29. He also would double the tax rate on other tobacco products to 20 percent.

Brownback sought a similar tax increase for cigarettes and a liquor tax of 12 percent in 2015. The Legislature approved a 50-cent-a-pack increase for cigarettes that year.

The governor would freeze income tax rates for the lowest tax bracket at 2.7 percent instead of letting it drop to 2.6 percent in 2018.

He would preserve the income tax exemption for limited liability companies, S corporations and other closely held businesses that some lawmakers seek to repeal. But he proposed taxing rents and royalties to bring in $40 million a year. Repealing the exemption entirely would bring in about $250 million.

He also proposed increasing the annual filing fee for for-profit entities from $40 to $200.

“I think the tax proposals are going to fall short of what we need,” said Rep. Steve Johnson, a Republican from central Kansas and the House tax chairman. His committee will hold a hearing on a bill to repeal the business exemption next week.

Rep. Kathy Wolfe Moore, a Kansas City, Kan., Democrat, said Brownback’s budget proposal pointed out the need for more comprehensive tax reform.

“I think the governor just made the case for reforming the tax plan…because this does outrageous damage to rural highways, KPERS, hospitals,” she said.

Selling tobacco settlement proceeds

Perhaps the most controversial proposal is one the governor has offered before: Selling future proceeds from a legal settlement with the tobacco companies.

The state receives approximately $60 million annually from the settlement. Under Brownback’s plan, the state would forgo that payment in the next 30 years in exchange for cash now — an estimated $530 million over two years.

It’s difficult to estimate how much the state would be giving up in the deal.

At the current rate, the state would receive more than three times the $530 million over 30 years. But the annual amount fluctuates and is expected to go down as tobacco sales decline.

Rep. Troy Waymaster, a Bunker Hill Republican and the House budget chairman, called the 30-year commitment “way too long” and said the proposal would cause “a lot of angst” among lawmakers.

“I really don’t think that’s going to gain any traction,” Waymaster said. “The governor’s proposals are a baseline. Obviously, that’s what he thinks he would like to do to move forward. The Legislature may have different avenues that we’re going to be taking. That may be one of them where we’re not going to feel too warm about liquidating the fund.”

The money now pays for children’s programs, such as Early Head Start. The budget proposal would pay for these programs through the general fund through 2019.

Annie McKay, the president of Kansas Action for Children, which advocates for programs that benefit children, said even if the state pays for the programs through 2019, selling off the settlement will have a long-lasting impact.

“The governor gets out of the building (in 2019) and then once he’s out of the building we go back to have a structural imbalance and the point at which we become concerned is that there will be no resources in future years to support early childhood programs,” McKay said.

Denning said the amount of the money that the state would get from selling the tobacco settlement is about the same as it would generate from ending the income tax exemption for business owners. He said lawmakers could do that instead.

“He did a lot of work for us. We can just take that one number out and plop the other one in,” Denning said.

One health plan for all schools

The governor would replace health plans at all 286 school districts with one mandatory state-run plan, a change recommended by efficiency consultants to save an estimated $120 million over two years.

David Smith, spokesman for the Kansas City, Kan., school district, said he didn’t know how the state could untangle all the 286 school districts’ health plans.

The health plans vary from district to district, he said, with some putting more money into salaries and others spending more on maintaining a strong health plan.

“You’re throwing all those (agreements) up into the air,” Smith said. “…I just don’t think it’s workable.”

Brownback also wants to require school districts to buy goods through a joint procurement program.

The tax proposals, changes to school district benefits and use of the tobacco settlement would go toward shoring up the state’s finances for the fiscal year that begins in July. Under these proposals, the governor’s office estimates, the state would have $216 million in its general fund at the end of June 2018.

Sullivan warned that if lawmakers refuse to pass the more controversial policies, the state could face a shortfall of $869 million by that time.

Long-term investment fund

To fill the current fiscal year’s shortfall of more than $340 million, Brownback wants to liquidate the state’s long-term investment fund.

The state invests idle funds from state agencies every year. Brownback can already tap roughly $45 million from the fund, which represents investment profits, but will need the Legislature’s approval to take $317 million in principal.

Brownback proposes paying back the fund over seven years.

The governor also wants to freeze the state’s contribution to KPERS, the state employees’ pension fund, at 2016 rates, which would allow it to keep $85 million. Under that plan, it would take another 10 years to pay down the state’s unfunded pension liability.

“A lot of the challenges we face are because of many, many years of underfunding the system and trying to play catch-up on that,” Sullivan said.

If lawmakers agree to these proposals, the state would have roughly $99 million in its general fund at the end of June. Brownback asked lawmakers in his State of the State address to pass a bill making the current year’s budget adjustments before the end of January.

“The mere fact that the number of items that the Legislature will have to take action on in order for this to actually balance at the end of the day is indicative of how much of the onus is laid at the feet of the Legislature,” said Rep. Erin Davis, an Olathe Republican. “We are within the last five months of the fiscal year, and making a cut of $350 million is a substantial cut.”

Sen. Carolyn McGinn, who heads the Senate’s budget committee, said she thinks the majority of the fix for this year’s shortfall will have to be budget cuts.

“I’m certainly going to be looking in the next couple of weeks if we can figure out how to squeeze some money out of somewhere else,” said McGinn, a Sedgwick Republican. “Nobody likes cuts, but if we continue to avoid fixing this immediate budget problem, it’s only going to make things worse in the long run.”

Read more from the Kansas City Star.