In this issue …

Ø Is Governor’s tax plan in trouble?
Ø ITEP study finds more cost in tax plan
Ø Arthur Laffer promotes his book
Ø Senate Tax Study Group meets today for public input
Ø KEPC testimony

Is Governor’s tax plan in trouble?

There is rising speculation in the halls of the Statehouse that Governor Sam Brownback’s plan to reduce and eventually eliminate the individual income tax may be in trouble because it steps on too many toes, is complicated, and the numbers seem to keep changing.

Some of the troubling circumstances:

• Opposition by realtors and homebuilders – The first volley came this week in a Wichita Eagle story, saying, “Wichita Realtors and builders are upset with Gov. Sam Brownback’s plan to eliminate the mortgage interest tax deduction, saying that piece of the governor’s state tax reform plan will stymie an already struggling housing market.”  The groups followed up with a presentation at a meeting of South Central Kansas legislators.
• The Governor has indicated oil and gas interests have no problem with his proposal to eliminate the two-year severance tax exemption on new pool oil and gas wells, with the exception of oil wells that generate fewer than 50 barrels a day.  However, reliable industry sources say out-of-state oil interests never agreed to anything, and in-state oil and gas folks may be divided on the exemption.
• Budget director Steve Anderson testified that he believed most people would continue to give financial support to their churches despite elimination of charitable deductions.  Research by the Chronicle of Philanthropy indicates that is probably true for religious organizations, but not for others such as educational foundations.
• New figures on the Governor’s plan show those making under $25,000 a year would pay additional taxes, due to the proposed elimination of the Earned Income Tax Credit.
• New figures show the plan is not revenue neutral, as the Governor stated last week, but will cost the state over $90 million dollars.
• Making the one cent sales tax permanent could be problematic in the House of Representatives, which rejected it during debate last year.
• A new study shows Kansans will pay $76 million more in federal income taxes as the result of the Governor’s plan (see story below).
• Some conservative Republicans who voted for last year’s bill to phase out the income tax (Substitute for Senate Bill 1) are grumbling about the many moving parts and the lack of advance vetting.

Early speculation revolves around a scenario where House Leadership introduces its own plan, a cleaned-up version of last year’s Substitute for Senate Bill 1.

ITEP study finds more cost in tax plan

An analysis of Governor Sam Brownback’s income tax reduction plan by a Washington, D.C. research organization indicates it will cost Kansas taxpayers more in federal taxes.  The Institute on Taxation and Economic Policy report says:

“While the Governor’s plan would reduce Kansas taxes overall, it would actually increase federal income taxes on Kansans substantially. Because state income taxes can be written off on federal tax returns by those Kansans itemizing their federal income tax returns, Kansas itemizers would have less state income tax to write off and would see their federal income taxes increase by about $76 million overall, under this proposal.”

A chart in the Institute’s study also seems to indicate only Kansans making over $90,000 a year will get any kind of overall tax reduction.

The report is expected to be part of testimony today to the Senate Tax Study Group.

 

Arthur Laffer promotes his book

Reagan-era “supply side” economist Arthur Laffer spoke to the House and Senate Tax Committees in Topeka Thursday, often promoting a new book about how he would reform California’s fiscal problems.

He seemed to answer some of the questions by suggesting that the answers were in his book.

Laffer is a paid consultant who helped the Governor develop his tax plan.  He was a member of President Ronald Reagan’s Economic Policy Advisory Board.

He told legislators that in the last 60 years, eleven states have introduced a progressive income tax, and that in the five years prior to enacting the tax, those states had a higher share of gross domestic product than they do now.

Laffer said prosperity is determined by overall tax burden, and that lower tax burden states perform better.  He was strongly challenged about his conclusions by Senator Tom Holland (D-Baldwin City).

 

Senate Tax Study Group meets today for public input

The Senate Tax Study Group appointed by Senator President Steve Morris (R-Hugoton) will hold its second meeting this morning in the Old Supreme Court Chambers of the Statehouse.  Chairman Les Donovan (R-Wichita) will take public testimony, but will limit the amount of time each speaker will have.

Donovan says the committee will deliberate and attempt to recommend what action the state should take on taxes at its meeting on Friday, January 27.

 

KEPC testimony

Here is the testimony that KEPC will deliver at this morning’s Senate Tax Study Group:

 

Testimony on Tax Policy
Senate Tax Policy Group
January 20, 2012

Mr. Chairman and members of the committee, thank you for the opportunity to submit testimony on this important topic.  I’m Bernie Koch with the Kansas Economic Progress Council, a statewide not for profit organization of businesses, trade associations, chambers of commerce, and individuals.  We support pro-growth policies for communities and the state.

Lowering taxes can be an important part of those policies.

However, other factors that can be encouraged by government have been shown by respected empirical studies to be as important, if not more important, including investment in infrastructure and equipment; labor efficiency; education, and innovation.

The investment rate in plant and equipment, including efficient physical and communications infrastructure, has a strong positive impact on growth.  The higher an economy’s capital intensity (machines, buildings, roads, bridges, etc.), the more prosperous the economy.

Human capital and the efficiency of labor have also been shown to be significant to growth.  Measures of human capital include the literacy rate, school enrollment ratios, and labor demographics.

Linked to investment and human capital, there is substantial support for the contribution of continuing technological innovation and improvement in sustaining economic growth.  This suggests that support for research and development and education is important.

Public policy which supports economic freedom through open economies supports higher growth rates.  We would include tax structure and business regulation in this category.

Reliable legal systems are a significant basis for economic growth.  These systems provide dependable enforcement of private contracts, protection of private property rights, effective law enforcement, and an absence of corruption.

With the attempts to phase out the individual income tax last legislative session, we began to look at the states without an individual income tax and found other factors at work that significantly affect their economies.

States without an income tax usually have abundant natural resources or heavy tourism that results in significant state revenue.  States without an income tax depend more on sales and property taxes to fund government services.  And states without an income tax often have many kind of other taxes and fees that we don’t have in Kansas.

Alaska – Alaska does not have an individual income tax, but it does have a 9.4% corporate income tax.  According to the Tax Foundation, Alaska draws a nation-high 52.6 percent of its state and local revenue from a group of taxes that includes severance taxes on natural resources, stock transfer taxes, estate taxes, and fees for hunting, fishing, and driver’s licenses.  Alaska is the second-highest oil producing state and collected $7 billion from its severance tax in 2011.  Over 25 percent of the workforce works for government.

Wyoming – Wyoming does not have individual or corporate income taxes, but like Alaska, Wyoming has rich natural resources.  It’s now the largest coal mining state, producing 40 percent of our nation’s coal each year.  25 percent of the workforce is employed by government.  Wyoming is running a deficit and will have to dip into its rainy day fund.

Florida – Florida has no individual income tax, but has a corporate income tax of 5 percent.  Florida’s economy is based on tourism and international trade.  Florida is the top travel destination in the world.

Over 60 percent of Florida’s budget is based on their 6 percent state sales tax.  Their legislature is trying to figure out how to tax online sales to fill their budget gap.  There’s also a proposal to increase the sales tax by three percent to buy down the hated property tax.

Nevada – Nevada has no individual or corporate income tax and it is in the most trouble of any state right now.  It has the highest unemployment rate in the country.  Its budget relies heavily on sales tax paid by tourists and the tourists are slow to come back to the casinos after the Recession.

South Dakota – South Dakota has no individual income tax, but it does have a state corporate tax on financial institutions.

Over 56 percent of their revenue comes from sales tax.  The most valuable industry sector is finance, insurance, and real estate.  Several large financial companies have operations located in the state, especially in Sioux Falls.

The financial service industry began to grow after South Dakota became the first state to eliminate caps on interest rates.  That attracted Citibank in 1981, which moved its credit card operations from New York.  That was the spark that helped South Dakota, along with a good work force and low real estate prices.

The population is growing, but like Kansas, rural areas have declining populations.

Washington – The State of Washington does not have an individual income tax or a corporate income tax.  The largest sector of the economy is aircraft manufacturing.  Of course, that’s Boeing.  I would point out that Boeing moved its headquarters to Chicago in 2001.

Washington State has something called a Business and Occupation Tax that applies to almost all businesses located or doing business in the state.  It varies depending on the type of industry.  It’s a tax on gross income.

Washington relies on sales tax more than any other state.  It’s over 60 percent of their revenue.

Washington raised several taxes in 2010, including the cigarette tax by a dollar, to over $3 a pack.  The legislature is now considering a new $5 per tire fee on certain kinds of tires.  The state has a $2 billion budget gap, which they are considering dealing with by limiting Medicaid coverage.

Texas – Texas has no individual income tax or corporate income tax.

Texas is home to at least one-third of the jobs created nationwide since the recession ended in 2009

The state’s economy is growing about twice as fast as the national rate.  About 40 percent of the job growth came in three areas:  natural resource production, education and health services, and government.

The oil and gas industry now delivers roughly $325 billion a year to the state, directly and indirectly. It brings in $13 billion in state tax receipts, or roughly 40 percent of the total,   financing up to 20 percent of the state budget. 29 percent of all oil and gas workers in the United State live in Texas.  It’s the fracking.

Other factors that influence the Texas economy include trade with Mexico, a large amount of federal spending on military, and the ports on the Gulf of Mexico.  There are 14 of them, including Houston, the 2^nd largest port in the U.S.

Over 20 percent of Texas revenues come from other taxes, such as:

• A fee on oysters taken from Texas waters
• A petroleum products delivery fee
• An automotive oil sales fee
• A fireworks tax
• A vehicle battery sales fee that’s two to three dollars per battery
• A 14 percent mixed beverage tax
• For every customer who enters a sexually oriented business, there’s fee of $5

I bring all of this up about other states because these are significant factors in the economic performance of non-income tax states that are not taken into account by Dr. Laffer’s studies.  That’s not to say there’s no merit in looking at individual income tax reductions, especially for businesses.  That may be helpful.

It would also be beneficial to look at corporate taxes.  There is a really valuable new study that was released by the Arkansas State Chamber of Commerce recently that included information about Kansas corporate tax structure that seems significant.  The study was done by Ernst & Young.

The report looks at the effective tax rate after statutory tax credits on different kinds of businesses in eight states in the region, including Kansas.  The eight states are:  Arkansas, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee, and Texas.

The taxes included are corporate income taxes, franchise taxes, sales and use taxes on business purchases, and local property taxes.

The types of companies considered are corporate headquarters, research and development, durable goods manufacturing, food product manufacturing, renewable energy equipment manufacturing, motor vehicle parts manufacturing, and business support services.

Some of the findings:

• Missouri out-competes all of the other states studied in five of the seven categories: research and development, durable goods manufacturing, food product manufacturing, renewable energy equipment manufacturing, and motor vehicle parts manufacturing.
• Texas is most competitive in the region for company headquarters and business support services, but scores poorly on tax burden for renewable energy equipment manufacturing.
• Kansas beats Texas in both renewable energy equipment manufacturing and motor vehicle parts manufacturing.  Kansas beats all other states studied in these categories except Missouri.
• Effective tax rates vary widely in Kansas by business.  For example, Kansas business support services have an effective tax rate of 19.7% while durable goods manufacturing has an effective tax rate of 8.1%.  Kansas has the highest tax burden in the region for services, but among the lowest for manufacturing.
• Missouri’s tax credits average 27%, the highest of the states studied, and have a significant impact on that state’s business tax rankings.
• Kansas effective tax rate on corporate headquarters is 11 and a half times as great as Texas in this category.

I have included the most important chart in the study in my testimony.

I suggest the legislature needs to look at our competitiveness in this area as well.  Our Effective Tax Rate on business services is the highest of any Effective Tax Rate in any state on any kind of business.  That really sticks out.

There are many who say our tax system is broken and we must do something.  I would ask this question.  Is it broken or does it seem like it because we are trying to recover from the greatest economic downturn since the Great Depression?

Thank for considering that question and also for taking a broad look at Kansas tax policy.