TOPEKA — Gov. Sam Brownback’s veto of tax legislation represents a “credit negative” to Kansas, a ratings agency said Monday — a label that amounts to a warning shot for the fiscally challenged state.
Brownback vetoed House Bill 2178 on Wednesday. The Legislature attempted to override the veto hours later, succeeding in the House but falling three votes short in the Senate.
Moody’s criticized the veto in a statement.
“With the state for now sticking with a lower-tax policy, Kansas will continue to struggle to balance its budget, consider deferring pension contributions again, and drain its highway fund of funding for crucial transportation projects,” Moody’s senior analyst Dan Seymour said.
Moody’s commentary constitutes a “credit negative” to the state, but the ratings agency didn’t change the state’s credit outlook or downgrade its rating. Still, Seymour warned the state’s credit might be at risk in the future.
“Continuing to resort to stop-gap measures that do not resolve, or may even worsen, the state’s long-term structural problems would intensify the pressure on Kansas’ credit quality,” Seymour said.
The agency said that while it expects Kansas to resolve its fiscal problems eventually, the longer its budget remains out of balance, “the greater the risks to its credit quality.”
Moody’s said Kansas has the ability to strengthen its finances and that its economic base is stable. Its long-term liabilities are moderate but growing rapidly, the agency said.
Moody’s rates Kansas Aa2, with a negative outlook. Another major ratings agency, S&P, rates Kansas at AA-.
S&P moved the state’s credit outlook from stable to negative earlier this month.
Moody’s statement Monday shows the ratings agencies are keeping tabs on developments in Kansas, where lawmakers have left Topeka for a week after a bruising tax fight.
House Bill 2178 would have raised personal income taxes and reinstated a third tax bracket. It also would have repealed a tax exemption for pass-through business income, called the “LLC loophole” by critics.
In total, the bill would have marked a striking rollback of Brownback’s 2012 tax cuts. The legislation would have raised more than $590 million next fiscal year, at a time when Kansas is projected to face a budget shortfall in fiscal year 2018 of more than $500 million.
When Brownback vetoed the bill in an unusual veto ceremony, he called it a “punitive tax increase on working Kansans.”
“Legislators who voted for this largest tax hike in Kansas history will try to persuade you that it is primarily a tax on wealthy business owners. This is false,” Brownback said. “Rather, this bill is an assault on the pocketbooks of the middle class.”