Gov. Sam Brownback has always cited Texas as a model for the kind of no-income-tax state he wants to create here.
While Texas doesn’t tax the income of individuals, it does have a franchise tax on business that is so close to an income tax that the Kansas Department of Revenue officially recognizes it as one.
State Democrats say the governor ignored the Texas franchise tax to mislead voters and advance an ongoing political agenda of shifting the state tax burden from businesses and the wealthy to ordinary workers who pay a higher share of their income in sales and property taxes.
“It’s misleading not to look at the whole tax structure,” said Democratic state Chairwoman Joan Wagnon, a former Kansas secretary of revenue. “He’s just looking at one piece of it.” Brownback said many officials cite Texas as a successful example of a state without income taxes.
“I think you can hold them up as a no-income tax state,” he said. “I’m not the only one who holds them up that way. Most are. There are different permutations on things. But I think most people would look at Texas as a no-income-tax state.”
The Texas franchise tax, also called a “margin” tax, is usually levied against business revenue minus expense deductions, much like an income tax.
But by using a different name and a more complicated method of calculation, Texas has been able to legally skirt its constitutional prohibition on income taxes and tap businesses for $4.5 billion a year, the state’s second-highest source of revenue behind sales taxes.
Kansas can’t do that. The Legislature eliminated the Kansas franchise tax in 2011.
Asked about the Texas franchise tax, Brownback said, “You’re going to collect your revenue somewhere, and a key part of it is holding your cost down so your revenue stream doesn’t have to be quite as large. But you’re going to need to collect revenue to run the state somewhere.”
Texas ran into that reality in 2006 under pressure from a court decision that the state was underfunding its schools.
In response, the Texas Legislature revised the franchize tax to capture revenue from limited liability companies and corporations organized under Subchapter S of the federal tax code.
Both states tax the income of regular corporations, but when it comes to LLCs and S-Corps., Texas and Kansas have taken opposite approaches.
Texas taxes the revenue of the businesses directly, while Kansas taxes the wages of the people that work for such businesses.
Last year, at Brownback’s urging, the Legislature eliminated the income tax on owners’ profits from LLC and S-Corp businesses in Kansas.
Both houses of the Kansas Legislature have passed bills to cut income taxes again this year to stay on Brownback’s “glide path to zero” on personal income taxes.
Those bills will now go to a conference committee, where six lawmakers – three representatives and three senators – will work to hammer out a single bill.
For more than a year, Brownback has cited Texas as his model state for taxation and the inspiration for reducing personal income tax to zero.
Probably the best-known instance was the catchphrase of his State of the State speech in January: “Look out, Texas, here comes Kansas!” delivered to both houses of the Legislature and broadcast statewide.
“When I started as governor, we had the highest state income tax in the region; now we have the second-lowest, and I want us to take it to zero,” Brownback said.
As he has many times in the past, Brownback lamented the state’s loss of residents to the Lone Star State in the January speech and during a recent appearance on Fox Business Channel.
“Fortunately, we get people in from California, but we lose them to Texas,” Brownback said on Fox.
He added that he sees eliminating the income tax as critical to reversing the population loss.
“We’ve really got a red-state (Republican) model going,” he said. “There are a number of us as red states going at this – Nebraska, Louisiana. Texas obviously is already there.”
Interpretation of facts
Rep. Jim Ward, D-Wichita, said Brownback distorted the Texas tax system to gain political points for his plan to zero out the income tax.
“It’s just another example of the Brownback administration playing fast and loose with the facts,” Ward said.
In the State of the State address, Brownback “failed to tell us that Texas funds their schools with a margin tax and it was the result of a lawsuit,” Ward said. “We can disagree on policy, we should disagree on policy. But the math and the facts should match.”
Brownback’s Budget Director, Steve Anderson, said zero personal income tax is a big factor for executives who make the decisions on where their businesses will have their headquarters, because it’s the equivalent of a pay raise for them.
“The governor believes, like I believe, if you’re going to have a tax base, it should be a consumption tax base (and) that the income tax is punitive, that it disincentivizes business,” he said.
Contributing: Brent Wistrom of The Eagle