Kansas Legislature Takes the Yellow Brick Road to Restore State Revenues and Budget Stability

The Kansas legislature ended its 2017 session last week by passing a two-year state budget, but the big news out of Topeka came earlier when the legislature voted to override Governor Sam Brownback’s veto of its bill to reverse tax cuts that were enacted in 2012 and 2013. Restoration of former income tax rates was a key component of the state’s budget, which includes a $1.2 billion tax increase from the revised rates over the 2017-19 biennium.

The governor had initiated the income tax cuts in 2012 as the cornerstone of his plan to jumpstart the Kansas economy. The economic growth he envisioned did not come to fruition, and with reduced revenues and growing deficits, the state was forced to borrow and divert funds from projects and defer pension contributions to balance recent budgets. Moody’s and Standard & Poor’s responded with a number of downgrades, lowering the state’s equivalent GO ratings from Aa1 and AA+, respectively, to Aa2 and AA-, both with negative outlooks. Given the bleak prospects for sufficient revenues for the new budget, the legislature voted to restore most of the pre-2012 income tax rates. The governor responded by vetoing the bill to reinstate the income taxes. The decision to override the governor’s veto came from both sides of the aisle in the capitol, including members of the Brownback’s own political party.

Subsequent to the legislative override, Moody’s revised the outlook on its Aa2 rating from negative to stable, citing the income tax increase that should reduce the state’s fiscal pressures. While we have not seen any action from S&P after the veto override, we expect that the increased tax revenues should be a credit positive for S&P analysts.

Source: Bloomberg News, kcur.org, Moody’s, Standard & Poor’s, Topeka Capital-Journal