CRE: State Tax Changes Expected to Weigh on Budget in FY 2025

Nathan Kessler | December 10, 2024

The Consensus Revenue Estimating (CRE) Group met in November 2024 to project state economic conditions in the coming fiscal year.

This group, which meets each April and November, is comprised of the Director of the Budget, Director of Legislative Research and staff from the nonpartisan Kansas Legislative Research Department, and economists from state agencies and universities. You can learn more about the estimating process here.

The newest estimates were released on November 22. Here are the key takeaways:

• Final State General Fund (SGF) receipts for FY 2024 totaled $10.14 billion, which was an increase of 9.2% above FY 2023 receipts.
  
  
• Total receipts for FY 2025 are expected to decline by 4.0% to $9.73 billion, reflecting anticipated declines in tax revenue from the elimination of state sales tax on groceries and changes to the Kansas tax code contained in SB 1.
  
  
• Cash balances are expected to decline as SGF transfers are required to fill in the gaps created by tax cuts, primarily for K-12 school funding.
  
  
• The Kansas unemployment rate is forecast to rise from 3.0% in 2024 to 3.4% in 2025. However, that is still well below the U.S. unemployment rate, particularly as labor market conditions continue to soften.
  
  
• Economic conditions are expected to cool slightly as inflationary pressures continue to moderate.

The Big Picture

Forecasts from the November 2024 CRE meeting tell the story of a moderating state economy. As multiple years of high inflation and record low unemployment normalize, economic indicators for Kansas will likely return to pre-pandemic levels. However, there remains the potential for economic shocks as geopolitics and economic conditions beyond our state’s borders continue to shift.

Years of federal aid and high tax receipts in the wake of the pandemic have left Kansas with a record budget surplus and a rainy day fund balance exceeding $1.5 billion by the end of FY 2024. This should enable Kansas to weather short-term economic volatility. As the budget begins to feel the impact from recent tax cuts, though, it will be important for lawmakers to be good stewards of the state’s finances. The temptation to enact sweeping tax cuts or draw down from our state’s emergency reserves should be resisted until the state has more clarity surrounding the impact of recent cuts and global macroeconomic conditions.

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