During its “vote-a-rama”, the Senate approved an amendment (by 86-13; amendment 3114) to remove the prohibition against states using federal funds to make up for tax cuts. As we wrote in May, it is common federal practice to prevent state/local governments from simply substituting locally sourced funds with federal monies. This is so that the intention of legislators at one level of government to fund a specific goal or program is not thwarted by state/local governments using the funding for another purpose.
As many readers may remember, Kansas Governor Brownback put in place a significant state income tax cut in 2012 with the promise that the cut would spur enough new activity to make up for lost revenues. By 2017, the state had implemented nine rounds of budget cuts and had three credit downgrades. The state used its reserves, put off pension contributions and cut Medicaid. K-12 schools and state universities were particularly hard hit. What followed was under-performance by the state’s economy in most measures: employment, GSP and revenue collections.
(Hence our play on Dorothy’s comment in the 1939 movie “The Wizard of Oz” she says, “Toto, I have a feeling we’re not in Kansas anymore.”)
The Senate’s action (although not final law as yet) sets up a similar environment for states that choose to fund tax cuts with federal money. What happens when the temporary federal stimulus is spent? We may well see certain states implementing budget cuts and suspending contributions to infrastructure, pensions and healthcare.
