Kansas Revenue Estimates Adjusted, Outlook Mixed

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Estimates for the State General Fund (SGF) are developed using a consensus process that involves the Legislative Research Department, Division of the Budget, Department of Revenue, and consulting economists from state universities. This estimate is the base from which the Governor and the Legislature build the annual budget. The Consensus Group met on November 2, 2017, to revise the estimates for both FY 2018 and FY 2019. For both fiscal years, the previous estimates were made in April and subsequently adjusted for legislation enacted during the veto session.

The overall estimate for FY 2018 and FY 2019 was increased by a combined $229.5 million. The estimate for total taxes was increased by $224.7 million, and other revenues were increased by $4.9 million for the two years combined.

For FY 2018, the estimate was increased by $108.3 million, or 1.6 percent, above the previous estimate. The estimate for total taxes was increased by $102.4 million, while the estimate for other revenues was increased $5.9 million. The overall revised estimate of $6.814 billion is 7.5 percent above final FY 2017 receipts.

The revised estimate for FY 2019 is $6.783 billion, which is $121.2 million, or 1.8 percent, above the previous estimate. The estimate for total taxes was increased by $122.3 million, while the estimate for other revenues was decreased by $1.1 million. The revised forecast for FY 2019 represents an 0.4 percent decrease below the newly revised FY 2018 figure.

Table 1 compares the revised estimates for FY 2018 and FY 2019 with actual receipts from FY 2017. Table 2 shows the changes within the FY 2018 estimate, and Table 3 shows the changes within the FY 2019 estimate.

Economic Forecast for Kansas

Several major economic variables and indicators have been adjusted downward since the Consensus Group last convened in April, especially Gross State Product (GSP) and Kansas Personal Income (KPI). The estimated rate of expansion in the nation’s economy has increased slightly, but the forecasted growth in the Kansas economy has been reduced. Real U.S. Gross Domestic Product (GDP) is now expected to grow by 2.1 percent in 2017, up from the previous forecast of 1.8 percent growth, while real Kansas GSP growth for 2017 has been reduced from 1.8 to 0.2 percent. Forecasted growth in U.S. real GDP for calendar year (CY) 2018 is now estimated at 2.5 percent in comparison to forecasted real growth of 1.5 percent in the state’s economy.

Personal Income

The previous 4.0 percent growth estimate for CY 2017 KPI has now been reduced to 1.5 percent, and estimated CY 2018 KPI growth has been reduced from 4.1 to 3.1 percent. The latest national estimates call for U.S. personal income (USPI) growth of 4.0 percent in CY 2017 and 4.3 percent in CY 2018, with both estimates unchanged since April.

Employment

The Kansas Department of Labor reports employment has remained stagnant since early 2015. The most recent monthly data show that total Kansas private sector employment from September 2016 to September 2017 had decreased by 2,900 jobs, while public sector jobs decreased by 900 jobs. Sectors with largest amount of job losses over the last year include trade, transportation, and utilities. Real hourly earnings in Kansas increased by 0.2 percent over the same 12-month period, while real hourly earnings were up by 0.7 percent at the national level. The overall Kansas labor force did increase by 0.6 percent from September 2016 to September 2017. Very modest, but geographically uneven growth in employment is expected to occur in the Wichita area, where labor markets remain tight, through 2018. The state unemployment forecast now calls for a rate of 3.7 percent in CY 2017 before increasing to 3.8 percent in 2018 and 4.1 percent in 2019.

“While I’m always a little bit skeptical of the Consensus Revenue Estimates, this adjustment follows the historical pattern,” says State Representative Bill Sutton. “When there is a sharp increase in taxes, expect a short-term influx of revenue, followed by a reduction in the overall economy.  You can’t take money out of the economy and expect it to grow; it’s like taking gasoline out of your fuel tank and expecting to go faster. Similarly, when taxes are decreased there will be a short-term reduction in revenue, followed by economic acceleration.”

Consensus revenue estimates are based on current federal and state laws and their current interpretation by the courts. These estimates will be further adjusted in mid-April prior to the conclusion of the 2018 Legislative Session. A great deal of uncertainty about the future of U.S. foreign policy, trade policy, health policy, immigration policy, and tax policy has already shown signs of increasing volatility in global and domestic markets. The impact of any such increased volatility on confidence as well as consumption and investment decisions by consumers and businesses alike will be monitored by the Consensus Group over the winter prior to the next meeting in April.