Plans could reshape how much of your money goes to Kansas
01/13/2012 10:59 PM
08/05/2014 5:36 PM
TOPEKA —State tax code. Just the phrase may make you want to stop reading and do something more exciting, like eat cold oatmeal.
But for most Kansans it means thousands of dollars a year in income, sales and property tax that goes to state coffers to pay for everything from roads to government employee pensions.
Who pays these taxes, how much they pay and who benefits may be about to change.
Gov. Sam Brownback has made clear he wants to alter the status quo in hopes of encouraging economic growth and retaining or adding residents.
It's unclear what he and an ad hoc task force of economists and business leaders who have been meeting privately will present in coming weeks. But he and other high-level appointees have hinted at reductions to individual and corporate incomes tax rates, prompting Democrats to warn of the dangers of reducing a revenue stream that makes up about half of the state's general fund.
Let's put the politics aside for a minute.
Kansas has three individual income tax rates and it changes, depending on what credits and deductions you're entitled to. For example, married couples with children pay less to the taxman than single people without children.
About 1.4 million people and businesses pay individual income tax, and about 29,000 file as corporate income taxpayers.
Of the $2.42 billion individual filers contribute to state coffers, roughly 70 percent comes from wages and salaries; 25 percent comes from interest, dividends, capital gains and retirement income; the rest _ about five percent _ comes from businesses that file as individuals instead of corporations, according to the department of revenue.
Businesses that organize themselves as corporations, must file corporate tax. Smaller businesses can file as an individual. The number of businesses that file as individuals fluctuates, but in the past decade it has been roughly between 178,000 and 200,000 a year.
Corporations contribute about a tenth of what individual tax filers pay. The state hauls in roughly $225 million in corporate income taxes. In that way, Kansas is similar to the federal government. The corporate share of total income taxes paid by businesses and individuals to the federal government is about 18 percent.
To understand more about who pays, tax gurus often look at a simpler breakdown: what percent of an individual's income is spent on taxes.
By this measure, the rich are charged more. The 23,229 people and small businesses that made more than $250,000 in the 2008 tax year spent 4.51 percent of their income on state taxes. Although that's the smallest group of tax filers, their contribution to state coffers outweighs the income taxes paid by more than 900,000 Kansans who made less than $50,000.
The state income tax is referred to as a progressive tax because it takes a greater percentage from people who make more money. Regressive taxes happen when people with lower incomes pay a larger percentage of their money on taxes than the rich. Many people say this includes Kansas sales and property taxes, since everyone pays the same rate regardless of income (though rates vary city to city and county to county).
This is where it starts to get political again.
Brownback and a key paid consultant, Arthur Laffer, who worked with President Reagan, say cutting taxes for top-income brackets will help bring in new companies and help others expand. That would add jobs, which would mean more people contributing to the state via sales and property taxes.
Earlier this year, Laffer helped write the American Legislative Exchange's most recent annual report, "Rich States, Poor States."
He argues that states with high tax rates drive away businesses and the wealthy while those with lower tax rates attract investment by making it possible for businesses to be more profitable.
Brownback wrote the forward to ALEC's report, saying the evidence is overwhelming and shows states should leave more money in citizens' pockets to propel the economy.
"To those who doubt their research, I encourage you to watch Kansas during the next few years as we work to reset the state's course on taxes and let our citizens once again be the engine of economic growth," he wrote.
The governor and his staff have said their plan will start with a model that doesn't initially rely on projected growth and maintains the current revenue level. Several years out, the plan, as described in broad terms, would use any growth spurred by the tax cuts to cut even more.
Revenue Secretary Nick Jordan, who heads up the group discussing tax policy, declined to talk about the plan.
Democrats don't have any insider details on the proposal that is in the works, according to Joan Wagnon, who spent 8 years as secretary of revenue under former Gov. Kathleen Sebelius. Wagnon isn't convinced that cutting tax rates on the wealthy will spur enough growth to ultimately make up for the lost revenue.
"I'm very skeptical of the theories that are being pushed," she said. "And I am very concerned that when we get into the euphoria of a campaign that we start talking about 'wow, I cut your income taxes, what a good deal that is.' And yet there are some choices people have to make about are my property taxes going to go up? Are my schools going to get funded?"
Meanwhile, Wagnon said Democrats could consider a plan of their own. "But they don't have enough numbers to pass anything," she said.
Other revenue sources
John Wong, associate dean of urban and professional studies at the University of North Texas-Dallas, used to work at Wichita State University, where he conducted perhaps the most comprehensive study of Kansas income taxes in recent years.
He said Kansas has one of the most proportional tax systems in the country, spreading the tax burden fairly evenly in relation to people's incomes. He attributes the balance mostly to the way individual income taxes draw more from the wealthy.
Wong contends big cuts to income tax would have to be made up somewhere —most likely sales or property tax —and that it would create a system that puts disproportionate tax burden on the poor and middle class.
Property tax largely goes to fund local governments.
In Sedgwick County, residents pay $1,054 a year to the state in real and personal property taxes — the actual amount each person pays is based on what they own. Sales tax, meanwhile, fuels both state and local government. The state rate is 6.3 percent. Local governments can add to that — Sedgwick County adds one more percent.
Wong said states that have no income tax rely on unique scenarios such as huge oil and gas tax revenue or cash flows from gambling or tourism.
"You have to make up for it somewhere," he said. "You've only got so much money to spread around."
One way to do that is drawing in new businesses. But many of them get property tax breaks as part of incentive packages, and individual and corporate incomes tax rates are just one of many things businesses consider when locating or relocating, Wong said.
Another way is cutting spending by either limiting state services or finding fraud and waste. But Wong said that's never as easy as it sounds.
"One person's fraud, waste and abuse is somebody else's critical program," he said.
Take, for example, Brownback's decision earlier this year to cut funding to the Kansas Arts Commission. It's relatively little money compared to the state's budget, but it led to the loss of federal grant money and spurred the formation of several groups that publicly blast the decision.
Spreading the burden
Art Hall, director of the Center for Applied Economics at the University of Kansas and a go-to economist for Brownback, said that broadening the tax base by spreading it out over many sources at a low rate is the best way to spur growth. He acknowledges the political blowback that comes with taking away special tax breaks. But he said government can probably do a better job with the funds it has and that, as an economist, he wants to see a level playing field.
Hall said he would like to see the state back away from policies that provide exceptional benefits for select industries, such as the High Performance Incentive Program, or HPIP, that gives a 10 percent income tax credit on capital investments over $50,000.
Instead, he suggests allowing all businesses to "expense" their investments, meaning all businesses would be entitled to the same break. "Everybody should get the same deal," he said. "Why do some guys get the blockbuster deal?"
The trick, he said, is that companies, particularly aviation companies, would lose one of the advantages they've been benefiting from.
"You can get a lot of dogma around this stuff," he said. "Taxes are meant to fund government. Government should do things that are valuable. People want the government, but not if they don't feel like it's a valuable service. Nobody wants to pay five stars for three stars."
Brownback has said his tax task force is carefully assessing the policies to become more competitive.
While the new tax plan has not been unveiled, Laffer's report spells out ways that the state could become more economically competitive. The report gives Kansas low marks for having a progressive income tax, or one that increases the tax rate as income increases. It also gives Kansas low marks for its sales tax burden and for having more state employees per 10,000 residents than most states.
Many, including Wagnon, have suggested getting rid of corporate income taxes, which tax business income at 4 percent, with a 3 percent surtax on earnings over $50,000.
That brings in about $225 million a year, relatively small compared to the $2.42 billion hauled in via income tax on people and small businesses. Trimming that will leave companies with more money to reinvest in jobs or expansions, although some question whether companies will reinvest the savings.
State Sen. Dick Kelsey, R-Goddard, said he plans to file a bill in the 2012 legislative session that is similar to one he introduced in 2010, which would eliminate a long list of tax exemptions enjoyed by special interest groups.
It would zap corporate income taxes and reduce individual income tax, but it would draw in more revenue by making churches, some nonprofits and other groups that have previously been exempt pay sales taxes.
"It's totally unfair because some people get them and some people don't," he said. "Tax ought to be fair and treat everybody alike."
Wagnon said she has endorsed a similar concept. But each exemption has a constituency to fight for it, she said, making it politically difficult.
Kelsey's bill, which he plans to tweak before the session, would also begin taxing services instead of just products, meaning people would pay a sales tax every time they get a haircut or hire a plumber. He said he would eliminate the tax on food to avoid putting burden on low-income families.
"We all have to eat," he said. "Do we have to go to movie? Not really. And sales tax isn't going to stop people from going to movies anyway."