Work group suggests ways to correct Kansas’ inaccurate monthly tax revenue estimates

(Graphic by Audrey Hockersmith)

A work group tasked with finding improvements for the state group that estimates Kansas tax revenue recommended eliminating the current economists and no longer making monthly estimates.

“I do not understand how that’s an improvement,” John Carlin, Kansas governor from 1979-1987 and a Kansas State visiting professor in the Staley School of Leadership Studies, said about the proposal to eliminate the monthly tax revenue estimates.

The recommendations announced Tuesday were made by Gov. Sam Brownback’s work group tasked with identifying improvements to the Consensus Revenue Estimating Group.

Tax revenue is estimated by the Consensus Revenue Estimating Group, which has consistently made inaccurate predictions over the past few years.

For the current fiscal year’s first quarter, which consists of the last three months, the state is $67.7 million short on total tax revenue expectations. The September tax revenues were $44.7 million below the estimate, while they were short $10.2 million in August and $12.8 million in July.

In a 12-page report, the work group detailed its recommendations to eliminate inaccurate monthly revenue estimates.

The work group suggested eliminating the monthly estimates. This recommendation was listed under a call for greater transparency in the revenue estimating process.

Sen. Tom Hawk, D-Manhattan and a K-State alum, said this recommendation “disturbs me the most.”

He called the comparisons of actual to predicted revenue every month a “dipstick” indicator for the economy and state budget.

“Every business I know that intends to stay in business for the long-haul has at least monthly revenue and expense reports,” Hawk said. “They look at their balance sheets so they can make midcourse adjustments. If you don’t do that, how is anyone in the Legislature going to know whether or not we need to make some significant changes in how we do business?”

Carlin said the monthly estimates help indicate if changes to the state budget are necessary throughout the course of the fiscal year.

“(The monthly estimates) are important so you can see trends,” Carlin said. “If the trending is severe enough, you can step in and see some action.”

According to the recommendations, the monthly estimates, “should not be used to avoid trend analysis bias in revising future official estimates.”

Ed Olson, a member of the Consensus Revenue Estimating Group from 1998-2010 and a K-State professor emeritus of economics, said it is “a bad idea.”

“That may prove to be more embarrassing than the current situation of month-to-month … (because) this could give a more erratic appearance than the present system,” Olson said.

Academic economists

The work group also recommended removing the current economists and replacing them with a system where a request for proposals would find a single economist.

“It sounds to me like, potentially, a way to give a contract to someone you know will work with you,” Carlin said. “What you want to have and should have is an objective group laying out the truth, regardless of how it looks to anybody in the Legislature or the governor’s office. Just, ‘Here’s the way it is.'”

The Consensus Revenue Estimating Group is comprised of representatives from the Division of the Budget, Department of Revenue, Legislative Research Department and three university economists — one each from K-State, Kansas and Wichita State.

Olson, who was the K-State economist in the group for 12 years, said each economist and each of the three state departments calculate their own tax revenue estimates. Those six revenue estimates are then discussed until there is a consensus.

He said the estimates when he was a member were usually accurate, except during the Great Recession of 2008-09.

The university economists ensure independent views during the revenue estimating process, Olson said.

“I know that there were sometimes when … the people associated with the administration would have a view that would be different from that of the independent economists,” Olson said. “I would be afraid that if they only had one economist who depended upon the state that that person may just reflect the executive or the legislative point of view and you would lose the independent leavening of the academics.”

Lance Bachmeier, associate professor of economics, is the current K-State member of the group.

In an email to the Collegian, Bachmeier declined to comment on his role in making revenue estimates, why revenue estimates have been off and what his recommendations would be to fix the process.

“Unfortunately, as a member of the group, I allow Legislative Research and the Department of Budget to handle public communications on all issues,” Bachmeier said. “Therefore I will not be making any public comments.”

Anticipating change

In an email to the Collegian, Shawn Sullivan, Kansas budget director and a K-State alum, said he and the director of the Kansas Legislative Research Department “have agreed to move forward” on “a number of things from the report of recommendations.”

Included in these are recommendations to: “utilize outside macro-economic reports,” ” utilize more industry experts from various sectors,” “develop a better process for the sharing of information” and “more information and analysis.”

Other recommendations Sullivan included were to invest in new economic and revenue modeling software and to utilize “statistical methods to develop a base projection for the major tax sources.”

Sullivan said the elimination of the monthly revenue estimates and the university economists will be discussed but needs agreement for the Kansas Legislative Research Department/Legislature. If they were to be approved, it would not be until after November.

Other recommendations include pushing the estimate deadline from April to May to provide, “a better view of income tax collections for the last quarter of the fiscal year,” according to the report. Another proposal would separate capital gains from the individual income tax forecast.

Sullivan said both of these would be discussed, but also need approval from the Legislature.

Olson said there were several recommendations that he agreed with, including the separation of capital gains, because they are “almost impossible to forecast.”

Consistently inaccurate

Over the last fiscal year, which ran from July 2015 to June 2016, revenue from 10 of the 12 months was below the estimate. This resulted in tax revenues $265 million below the estimate during the time span. The revenue, on average, was a negative 4.5 percent off the estimate.

When February tax revenues were $53 million short, Gov. Sam Brownback cut higher education budgets by $17 million. This resulted in a $4.9 million cut to K-State.

Afterward, the university increased student tuition by 5.8 percent.

Since the income tax cuts championed by Brownback were passed in 2012, the state has struggled to have accurate tax revenue estimates. Since July of 2012, revenue has been $583 million below the estimates, with 34 of the 51 months overestimating tax revenue.

Carlin said when he was governor, the revenue estimates were more accurate than they are now.

“Were they perfect? No, but they were very close,” Carlin said. “I don’t recall having anything comparable to what’s going on now.”

How close? Enough that when estimates were off for a month, they would still usually balance out over the entire fiscal year, Carlin said.

Hawk blamed the recent inaccuracies on the “abysmal management of state government” and the “reckless” 2012 income tax cuts championed by Brownback.

“I’m very concerned about how we can change these disastrous policies that are hurting about everything I love about Kansas,” Hawk said. “It all falls back, to me, on the tax cuts and the mismanagement of the budget.”

Jason Tidd graduated from Kansas State University's Miller School of Journalism and Mass Communication in May 2017. He was the spring 2017 editor-in-chief, fall 2016 news editor and spring 2016 assistant news editor. While at K-State, Jason played baritone in the Pride of Wildcat Land marching band.