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Kansas governor opens door to slowing some planned tax cuts

(Reuters) – Kansas Governor Sam Brownback on Friday opened the door to slowing future tax cuts beyond 2016 if revenue fails to hit certain growth thresholds as the state wrestles with growing fiscal woes.

Brownback last year faced a bruising re-election campaign that focused on a drastic decline in state revenue and mounting fears about funding shortfalls for schools following steep income tax cuts that he had said would spur economic growth.

While the Republican governor vowed in his state of the state address Thursday night to “continue our march to zero income taxes,” his spending plan acknowledged that lost revenue, including $730 million from tax year 2013, has led to budget gaps.

Brownback also called for a new formula to fund public schools under his proposed two-year, $12.4 billion general fund budget plan, which would shift some pension costs to local school districts.

In addition, Brownback proposed hiking cigarette and liquor taxes to raise $212 million over the two years starting July 1 and instituting an amnesty program for unpaid taxes.

The state passed a major tax overhaul in 2012 that cuts income tax rates through 2018 and eliminates some taxes on business income. On Jan. 1, the rates fell to 4.6 percent and 2.7 percent. Brownback said the rate for the lowest income tax bracket will fall again next Jan. 1.

But he said the previously promised cuts in 2017 and 2018 would depend on tax revenue growing to 103 percent of the previous fiscal year’s revenue. His plan also called for higher revenue to be automatically placed into a budget stabilization fund until the fund reaches 5 percent of budget expenditures.

Lower tax revenue contributed to a $280 million shortfall in the current budget. It also led to downgrades of the state’s credit ratings by both Moody’s Investors Service and Standard & Poor’s.

Brownback also proposed halting Kansas’ school funding formula, the subject of an ongoing court battle, starting on July 1, and requiring the legislature to devise a new formula. He suggested funding schools through block grants until a new formula is in place.

Under Brownback’s proposal, districts, instead of the state, would pay $91 million to cover increased pension costs for the two years starting in July 1.

He noted that school retirement costs account for 63.7 percent of the Kansas Public Employees Retirement System’s $9.77 billion unfunded liability.

Brownback also called for shrinking state and school pension payments by $132 million by issuing $1.5 billion of pension bonds and extending the amortization period for pensions by 10 years to fiscal 2043.

(Reporting By Karen Pierog; Editing by Christian Plumb)

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