New revenue estimates reveal economic, tax and education funding issues (Part 1: historically weak economic growth)

The latest official consensus revenue estimates for the Kansas state general fund were released Nov. 10. Much of the attention has focused on a $345 million drop in expected revenues in the current year, as well projections for significant budget deficits in the next two years. KASB takes a more detailed look at how the new projections compare to longer term economic and budget trends in Kansas, and what it means for education funding.

The first part shows how Kansas personal income has consistently fallen below projections and trails the national average. The second part shows how state tax revenues have not kept up with income growth since the major income tax cuts of 2012 have decreased revenue to the state, resulting a lower percent of economic growth invested in education and public services. The third part shows how the failure of the Kansas economy to recover from the Great Recession and the failure of the tax cuts to stimulate the economy have squeezed state spending, including education.

Part I: Kansas economy continues to struggle.

A new consensus revenue estimate (CRE) is released each April and November by a group of state fiscal and tax experts and economists to predict tax and other revenues into the state general fund. A key factor in state revenue projection is growth in Kansas personal income, the total income of all residents in the state.

The U.S. Bureau of Economic Analysis defines personal income as “the income received by, or on behalf of, all persons from all sources: from participation as laborers in production, from owning a home or business, from the ownership of financial assets, and from government and business in the form of transfers. It includes income from domestic sources as well as the rest of world. It does not include realized or unrealized capital gains or losses.”

State personal income is important because it is the total income of the state population. Growth in personal income measures the economic well being of the state and how much people can spend, save and invest.

The CRE also includes estimates of inflation, measured by the Consumer Price Index. Subtracting annual changes in the CPI from changes in personal income shows to what extent the population is getting ahead of or falling behind the cost of living.

As has happened in almost every CRE in recent years, the estimated personal income growth for Kansas was lowered. For the current year (2016), the new estimate is 2.0 percent growth. The CRE also predicts that inflation will be 1.1 percent - so the “real” growth income after inflation is expected to be 0.9 one percent.

To put this in an historical context, the average annual growth in Kansas personal income since 1975 has been 5.7 percent. However, during much of that time, inflation has been higher than now. If adjusted for the average annual change in the consumer price index, average annual personal income growth has been 2.0 percent since 1975. This means the new estimate for 2016 is less than half the historical average for the past 40 years.

In fact, this low income growth has been the norm since the Great Recession began in 2008. Since then, average annual Kansas personal income growth has been 2.3 percent, or 1.0 percent if adjusted for inflation - slightly better than 2016 but far below the average since 1975.

The state’s slow economic growth has been even weaker following major state  income tax cuts in 2012. From 2009 to 2012, personal income grew 2.7 percent per year (1.0 percent after inflation); and from 2013 to 2016, growth was 1.9 percent per year (0.9 percent after inflation).

In addition, Kansas income growth has been noticeably worse than the U.S. average. U.S. personal income growth is now projected at 3.4 percent, compared to 2.0 percent in Kansas. Since 2008, U.S. income growth was 3.1 percent, compared to 1.8 percent in Kansas.

Between 2001 and 2008, between the post-911 recession and the Great Recession, Kansas personal income grew 5.0 percent - higher than the U.S. average of 4.7 percent.

In there any improvement on the horizon? The Bureau of Economic Analysis reports that Kansas personal income has risen more than the national average during the first two quarters of 2016, and the new CRE projects that Kansas personal income will increase 3.9 percent in both 2017 and 2018. However, it also projects that the U.S. average will increase at 4.1 percent and 4.0 percent.

In short, Kansas has experienced historically weak growth since the Great Recession, has recovered less than the nation as a whole; and the 2012 income tax cuts do not appear to have helped improve that trend.