‘You don’t want to be foolish’: KS, MO lawmakers weigh tax cuts amid budget surpluses

In Kansas and Missouri, the budget boom times are here.

The two states are starting 2023 with massive budget surpluses, sitting on piles of cash without precedent. More than $2 billion is available in Kansas and $6 billion in Missouri.

Lawmakers in both states now face two questions: What, exactly, should they do with all this money? And how long will the good times last?

The unallocated dollars offer lawmakers in both states the opportunity to approve sweeping increases in spending, significant reductions in taxes – or both. The surpluses are the culmination of a years-long fiscal turnaround, with both states going from tighter budgets in the past – and a tax cut-driven fiscal crisis in Kansas that ended about five years ago – to historic amounts of unspent revenue.

“We do have a stable economy and a surplus — those two things are real right now. You don’t want to be foolish to spend money years from now on very grandiose new programs that you don’t know if you’re going to have the money for,” said Missouri Senate President Pro Tem Caleb Rowden, a Columbia Republican.

The surpluses are set to pit ambitious plans for pay increases for state employees, funds for new infrastructure and more aid to education against a universe of potential tax cuts for everyone from grocery shoppers to businesses and retirees.

At the same time, some policymakers are urging restraint, warning that circumstances could quickly change. Rising interest rates, aimed at bringing inflation under control, risk stoking a recession in the coming months or, at the very least, cooling the economy and tax revenues with it.

In the months ahead, lawmakers must strike a balance between spending and tax priorities – and safeguarding against a potential future downturn. The Missouri General Assembly convened for its annual session on this past Wednesday, and the Kansas Legislature’s session will begin Monday.

In Kansas, Democratic Gov. Laura Kelly has rolled out a tax agenda that includes immediately eliminating the state sales tax on food, among the highest in the nation, after lawmakers last year approved, and Kelly signed, a gradual reduction. And while Kelly, who will begin her second term on Monday, won’t release her full budget proposal until next week, she has endorsed fully funding special education.

In Missouri, Republican Gov. Mike Parson has held his exact agenda close to the vest ahead of a budget rollout later in January, but has spoken broadly about spending more on infrastructure, a longtime priority of the governor. Last year, he secured an income tax cut, but Republican lawmakers are calling for more.

All of it amounts to the opening rounds in what may be a tumultuous spending and tax debate in both states.

Kansas and Missouri are already among a wave of states that have cut taxes in the past couple years. Individual income tax cuts in 11 states and corporate tax cuts in five states went into effect on Jan. 1, said Katherine Loughead, a senior policy analyst at the Tax Foundation, a Washington, D.C.-based think tank that advocates for tax reform.

“It’s a really unique environment we’re finding ourselves in and I think some of that will absolutely continue into 2023,” Loughead said.

But the focus on tax cuts comes amid growing fears the United States will experience a recession sometime this year. Economists surveyed by The Wall Street Journal this fall placed the probability of recession in 2023 at 63%, the first time the probability had risen above 50% in the survey since July 2020.

Still, recession fears haven’t stopped state legislators from taking action. States are “better prepared for the next recession than any other time in modern history,” Loughead said.

More tax cuts wanted

During a special session in September, Missouri lawmakers passed a bill that cuts the state’s top income tax rate from 5.3% to 4.95%. The plan also calls for gradual cuts over the next five years.

Missouri House Speaker Dean Plocher, a St. Louis Republican, now wants additional tax cuts.

“Today, Missouri is sitting on the largest budget surplus in our state’s history -- 5 to 6 billion dollars. As a fiscal conservative, I believe government should provide responsible infrastructure spending,” Plocher said in an opening floor speech on Wednesday. “I also know that our citizens are the best stewards of their money, and I believe we can build on the tax cuts from last year’s special session.”

“There is more room to return money to Missouri taxpayers. This is money that hardworking Missourians have earned. It is in fact their money.”

Pressed by reporters for information, Plocher said only that Republicans are “open to many different types of tax cuts for letting Missouri keep their own money.”

Plocher faces opposition from Democrats, who say Missouri’s rosy financial picture provides a significant opportunity to address areas that have been neglected. Democrats have called for state money and legislation to increase both state worker and teacher pay.

“Of course, a tax cut sounds great, but it’s a one time thing. What we need to be doing as a legislature is looking at what investments can we make for the long haul when Missouri isn’t in the kind of same financial situation that we’re in,” Missouri House Minority Leader Crystal Quade, a Springfield Democrat, told reporters.

Parson has divulged few specifics about his own spending priorities, beyond broadly calling for investments in education, infrastructure, mental health services and public safety.

Parson, in a brief interview with The Star, said Missouri’s economy had “weathered one of some of the worst storms you could ever possibly weather.” He said the state has to focus on creating jobs for the workforce if its good financial position were to continue.

The Republican governor touted the state’s recent income tax cut, but also said some of the state’s budget surplus should be used to aid workforce development.

“If we give it back to the people of the state, they spend the money and they drive the economy — that’s one of the great things about doing some tax cuts,” Parson said. “But the thing that we really isolate all the whole time is workforce development infrastructure. Those are the keys to how the states prosper.”

Some longtime state budget experts are urging lawmakers to resist the temptation to spend freely or pass deep tax cuts. The money available in both states, while large, isn’t infinite. It has been built up from robust tax collections and infusions of federal pandemic aid.

Like a savings account, once Kansas and Missouri spends these dollars, it will take time to build the balance back up again. The budget experts say lawmakers should avoid using this money to pay for ongoing expenses because they won’t always be able to count on it.

“The fund balances are one time, they ought to be expended on one-time things,” said Jim Moody, a state budget director in the early 1990s.

Kansas state Rep. Henry Helgerson, an Eastborough Democrat, criticized both parties for adding to government spending. Helgerson, who will be the top Democrat on the House Appropriations Committee, has long had a reputation as fiscal conservative.

He expressed little confidence that legislators will rein in their desires this year.

“There has been an unholy bargain made by Republican leadership and the executive branch to pump up spending over the last number of years,” Helgerson said.

Agenda will be tested

Kansas’ budget has recovered from the severe shortfalls caused by former Republican Gov. Sam Brownback’s income tax cuts, which were approved in 2012 and 2013. The following year, tax collections began to fall significantly short of expectations, leading to a fiscal crisis that lasted until lawmakers largely repealed the cuts in 2017.

Following the recovery, lawmakers “definitely don’t want to do anything that would jeopardize – where we’d find ourselves in a deficit situation again,” said Kansas state Rep. Troy Waymaster, a Bunker Hill Republican and chair of the House Appropriations Committee.

Recent fiscal fights in Kansas have focused more on taxes than spending. Budget bills have been passed with relatively few major blowups between Kelly and the Legislature.

Kelly has only hinted at her budget proposal heading into the 2023 session. The priorities she has outlined publicly include a large increase in funding for special education and a new juvenile correctional facility near Wichita. She also wants money to study how a cabinet-level position focused on childcare should operate.

The Democratic governor has already unveiled a tax agenda. In addition to calling for an immediate elimination of sales tax on food, Kelly is proposing to end sales taxes on diapers and feminine hygiene products, as well as creating an annual sales tax holiday in August for school supplies similar to one Missouri currently has in place.

Kelly is also proposing a reduction in income tax on Social Security benefits for retirees with incomes between $75,000 and $100,000 a year. Those with incomes of less than $75,000 are already exempt from paying state income tax on benefits.

In total, Kelly’s proposals are valued at about $500 million over three years. She has framed the tax cuts as possible because of responsible budgeting in recent years, including setting aside about $1 billion into a “rainy day fund” that Kansas officials can tap if tax collections falter. For context, Kansas is set to spend about $9.2 billion in state general funds in its current annual budget.

Some Republicans have signaled a willingness to work with Kelly on elements of her tax proposal, especially changes to how Social Security benefits are taxed. Speaking to reporters in December, Kansas Senate President Ty Masterson, an Andover Republican, said he was pleasantly surprised by Kelly’s plans.

Kelly has urged only careful tax cuts to avoid endangering the state’s financial health. For instance, she criticized a proposal put forward by her Republican opponent last year, outgoing Kansas Attorney General Derek Schmidt, to completely eliminate state income taxes on retirement benefits. And she appears to be drawing a line on large reductions in business taxes.

“This upcoming legislative session, I’m sure that some will propose using our surplus for permanent and expensive tax plans that provide no relief for everyday Kansans. That would be a mistake,” Kelly said at a news conference last month.

At least some Republicans have said they want more aggressive tax cuts than what Kelly is proposing. Kansas state Sen. Caryn Tyson, a Parker Republican who chairs the Senate Tax Committee, criticized Kelly for pushing tax cuts after calling tax cuts under Brownback and other GOP-led proposals “reckless.”

The budget surplus, Tyson said, should be returned to Kansans in the form of tax cuts as much as possible. To prepare for an economic downturn, she said the state needed to slow down its spending and enforce performance-based budgets on executive agencies.

“We’re looking at some rough times and we just need to use common sense going forward on tax legislation and spending,” Tyson said.