UPDATE 1-S&P downgrades Kansas in another blow to Brownback tax cuts

Wed Aug 6, 2014 1:25pm EDT

(Adds background, details of the report, tax cut history, political challenges)

WASHINGTON Aug 6 (Reuters) - Standard & Poor's Ratings cut the credit score for Kansas to AA from AA+ on Wednesday in another blow to the deep income tax cuts championed by Republican Governor Sam Brownback, who is struggling to keep his post in upcoming elections.

In a report explaining the downgrade, S&P said the Kansas budget is not structurally balanced and described a fiscal situation with very little breathing room.

S&P noted Kansas relied on a "substantial drawdown" of its general fund balance in fiscal 2014, which ended in June, to cover a revenue shortfall.

"Although Kansas has budgeted for the use of fund balances in fiscal 2015, it has also budgeted for 5 percent growth in 2015 general fund expenditures," it added.

In particular, S&P said "the state could easily face a negative general fund balance in fiscal 2015," essentially a deficit, if revenues come in even a little less than projected.

The agency also has a negative outlook for the state based on more tax cuts scheduled for future years, which it said could further damage the state's finances. It said the state expects receipts to fall by $682.3 million through the end of fiscal 2019 because of the cuts.

Under a plan passed in 2012, that Brownback said would spur economic growth, Kansas will ratchet down income tax rates through 2018 and eliminate some taxes on business income. S&P said the state had not passed deep enough spending cuts to offset the drop in the revenue.

Another rating agency, Moody's Investors Service, downgraded the state's credit score to Aa2 in April. It raised similar concerns about the lack of spending cuts, citing a sluggish economy and the state's use of one-time measures to balance its budget.

At the end of fiscal 2014 in June, Kansas reported its revenues were $338 million less than it had expected for the year.

Brownback has attributed revenue drops to President Barack Obama's tax policies, which he says depress the business environment, and to the weak capital gains collections that have hurt almost all states.

Brownback calls the cuts one of the largest tax relief measures in Kansas' history, and the Center on Budget and Policy Priorities, which tracks states' tax policies, said they were among the largest ever enacted by any state.

Democrats seized on the news of the S&P downgrade, with the Democratic Governors Association saying the cuts had hurt school funding and job growth.

Brownback, a former U.S. Senator elected as part of the Tea Party sweep of state governorships in 2010, is also facing criticism within his own party. He received only received 63.3 percent of Republicans' votes in Tuesday's gubernatorial primary, according to Politico.

In July more than 100 Republican leaders in Kansas endorsed the Democratic candidate for governor, saying that the tax cuts had hurt middle and low income earners and the state's economy. (Reporting by Lisa Lambert; editing by Andrew Hay)

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