Kansas chooses tax reform over tobacco settlement bonds

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On Tuesday, Kansas legislators voted to override Gov. Sam Brownback’s veto of a bill that would raise state income taxes, effectively ending the governor’s plan to reduce the budget gap by securitizing tobacco settlement payments.

The bill, which passed with a vote of 88 to 31 in the House and 27 to 13 in the Kansas Senate, would reverse tax cuts pushed by Brownback in an attempt to stimulate economic growth. It would create of a third income tax bracket for individuals making more than $30,000 annually and couples making over $60,000, but raise taxes for all income levels.

While Brownback's tax cuts were designed to stimulate economic growth, the state's budget gap has grown over the past five years. In January, the governor announced a plan to securitize tobacco settlements as a means to narrow the gap.

Kansas is one of 46 states that receive annual payment from major U.S. tobacco manufacturers under the 1998 Master Settlement, which is designed to compensate them for tobacco-related healthcare costs. Many states have securitized these payments in order to receive a lump sum payment. But in Kansas, they are dedicated to the Children’s Initiative Fund supporting early childhood education and other childhood development initiatives.

Brownback said that securitizing the payments would generate $265 million of revenue in the 2018 and 2019 fiscal years. However, Kansas Budget Director Shawn Sullivan stated that the securitization could generate as much as $775 million in total, depending on market conditions.

In March, the Kansas Senate voted against Gov. Brownback’s budget proposal, with legislators arguing that securitizing tobacco settlements solved a short-term problem but came with long-term implications. A few days before that vote, the Kansas Supreme Court deemed the state's education spending “unconstitutionally low.”

Last night’s override of Gov. Brownback’s veto is the nail in the coffin for tobacco securitization in the state. Proponents describe the tax reform as the first comprehensive solution to the state’s budget issue and a step toward increasing its education spending.

“A lot of people made it about me,” Brownback told reporters at a news conference. “But it’s not about me. It’s about Kansas. It’s about the future. It’s about which way we want to go. Do we want to be a high-tax, slow-growth or no-growth state, or a pro-growth state?”

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