Tuesday’s general election, combined with the August primary, has resulted in big changes that mean a more moderate anti-Brownback Kansas Legislature next year. This new majority of moderate Republicans and Democrats will be anxious to undo the state’s financial mess. But the 2017 Legislature should proceed with caution.
Part of the solution is to reverse the much-debated business income tax exemption. There are two problems with that, other than the objections of Governor Brownback.
Even if lawmakers reverse the business exemption the first day of the session, it won’t bring any significant revenue to the state budget for another year.
The second problem is that the state’s revenue shortfalls were not solely caused by the business exemption. About 70 percent of the revenue forgone since the income tax cuts came from the rate reductions granted to the remaining Kansans who pay individual income tax.
Then there are the problems with the Kansas tax structure that existed before the 2012 income tax cuts and continue today. Cited most often is the sales tax on food, but there are others.
For example, a 2011 study of business taxes in the region by Ernst and Young for the Arkansas Chamber of Commerce concluded Kansas has the highest effective tax rate in the region on business services, nearly 20 percent. The excessive burden was the result of high sales and property taxes.
That disproportionate tax load has been intensified by the income tax cuts and the two state sales tax increases since 2012.
How should Kansas proceed?
An excellent model is the 1995 Governor’s Tax Equity Task Force authorized by executive order of Governor Bill Graves. It was in response to strong anti-property tax sentiment following reappraisal and classification in the early 1990s. Although now dated, it was, and still is, the most comprehensive overview ever done of the Kansas tax structure.
The 280 page all-inclusive study incorporated 14 research papers by respected Kansas authorities who were experts in specific fields of Kansas taxation.
The 21 member Task Force came up with a list of tax policy objectives that have stood the test of time, such as, “The state and local tax system should be balanced and diversified,” a warning since ignored.
The report said, “Because all revenue sources have their weaknesses, a balanced tax system will reduce the magnitude of problems caused by over reliance on a single tax source.”
We violated this standard by trying to eliminate the income tax and becoming overly reliant on a single revenue source, the sales tax. With no action, that reliance will grow.
In 2012, Kansas hired celebrity economist Arthur Laffer for $75,000 to tell us to cut the income tax. In 2015, the legislature hired the consulting firm of Alvarez and Marsal for $2.6 million to do an efficiency study to tell us what we can do to try to live with the tax cuts.
As we look at tax policy solutions, we must take sufficient time and make thoughtful efforts to formulate the best answers toward finding our way out of our state’s fiscal disaster.
Something like the Tax Equity Task Force would be a good start to sorting out the solutions.
Bernie Koch of Wichita is the Executive Director of the Kansas Economic Progress Council.