Some conservative lawmakers are pushing for a flat tax that would make everyone pay a 3.9 percent income tax and eliminate most tax breaks, including those for some business owners.
Flat tax proponents say a single rate is fairer and would treat taxpayers equally. Opponents say that a flat tax would increase taxes on lower income residents, while lowering them on those who make more.
Gov. Sam Brownback’s office acknowledged this past week that the governor has discussed a flat tax proposal with lawmakers during the past few months, and hearings are scheduled Monday on two flat tax bills.
The Truth Caucus, a group of conservative lawmakers, is working on a plan with a 3.9 percent flat rate, said Rep. John Whitmer, R-Wichita. But some lawmakers also are looking at setting the rate at 4.9 percent and reducing or eliminating the sales tax on food, he said.
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Kansas taxes food at the same rate as other goods – 6.5 percent – and, when combined with local sales taxes, has one of the highest tax rates on food in the nation.
Whitmer said conservatives developing a flat tax also want no new spending in the state budget. Lawmakers are expected to begin work next week on a budget bill for the 2018 and 2019 fiscal years. The state is facing a projected $1.1 billion deficit over the next two years. The 2018 fiscal year begins July 1.
Kansas has two personal income tax brackets, with a low rate of 2.7 percent and a higher rate of 4.6 percent. The higher rate applies to individuals who make at least $15,000, or married couples who make $30,000 or more.
Whitmer acknowledged a flat tax may not have enough support, but suggested that if the bill doesn’t attract enough votes, lawmakers who voted against it may pay a price politically.
“Conservatives can’t just be the party or the group of no. We have to have our idea. So this is going to be an idea where we say, ‘Hey, this is a concept, here’s our plan. Come with us,’ ” Whitmer said.
House Minority Leader Jim Ward, D-Wichita, dismissed the idea of a flat tax. He said the Legislature is made up of three parties: Democrats, moderate Republicans and “ultra-conservatives.”
Conservatives are drafting bills they hope can get votes from moderate Republicans and Democrats, Ward said. He predicted a flat tax wouldn’t advance.
“I think ultimately there may be a few more votes, but I don’t think any of that has legs in terms of getting the number of votes to pass out of either chamber or getting the governor’s signature,” Ward said.
A flat tax would need to eliminate some tax exemptions, said Rep. Kristey Williams, R-Augusta. She favors ending the exemption for pass-through business income, used by approximately 330,000 entities. That exemption for limited liability corporations and other closely held businesses cut state revenue by about $260 million a year.
The state’s revenue problems are being caused by too many tax carve-outs and too few people paying into the system, Williams argued. She warned a proposal would have to overcome significant opposition from businesses and individuals who have tax exemptions or tax credits that would be eliminated.
“With this, they might lose that. It might be a win for some, it might be a loss for some,” Williams said.
Variety of factors
How much a flat tax would raise depends on a variety of factors. A flat tax could tax every dollar earned, or could exempt income up to a certain amount – potentially the first $10,000 or $20,000 earned. It also depends on the rate used.
The state’s current income tax system generated about $2.6 billion last year, according to the Kansas Legislative Research Department.
The House Tax Committee is scheduled to hold hearings Monday on two flat tax bills. As of Friday, an official analysis of the bills’ financial impact wasn’t available.
One bill would tax income at 3.9 percent. The other bill would impose a 5 percent tax rate on income above $10,000 for individuals or $20,000 for married couples. People making less than that would not pay income taxes.
A third idea – taxing income at 4.9 percent and exempting food from sales tax – is still being discussed and has not been introduced as a bill.
Brownback vetoed a bill that passed the Legislature last month that would have raised personal income tax rates, added a third bracket and eliminated the exemption for pass-through business income. An effort to override the veto fell three votes short in the Senate, and lawmakers have been attempting to craft a new plan since then.
A spokeswoman for Brownback said last week that the governor is open to considering legislation that makes the tax code “fairer, flatter and simpler” while keeping the tax burden as low as possible on families and businesses. Some lawmakers believe a flat tax stands a better chance of getting the governor’s approval than increasing tax rates.
“Ultimately, what we have to do is we have to find a solution enough people can support and one that the governor can support,” Rep. Dan Hawkins, R-Wichita, said.
“So if we can find that, I think that’s where we’ve got to be. And I think the governor has maybe signaled a little bit that he would be at least open to talking about a flat tax, so why wouldn’t we give that a shot?”
But Rep. Melissa Rooker, R-Fairway, who opposes a flat tax, said she doesn’t know what the governor would find acceptable. Brownback hasn’t shown any discernible leadership other than his veto, she said, adding that it was only three votes away from being overridden.
“I think, at a point, the Legislature needs to recognize the power we have to chart the course we take,” Rooker said.
Senate Minority Leader Anthony Hensley, D-Topeka, said a flat tax doesn’t stand a realistic chance of passing. He said flat taxes are regressive and would hit lower-income individuals the hardest.
“I think it would be a disaster. I think it would be far worse than the income tax system we have today where we have only two brackets,” Hensley said.
A flat tax would hurt low earners “a lot more” than the tax plan Brownback vetoed last month, Sen. Dinah Sykes, R-Lenexa, said.
“I do not support it,” Sykes said. “It’s not real revenue reform. It doesn’t address the problem.”
Eight states have flat tax systems, according to the Tax Foundation, a Washington-based group that advocates for low taxes. The states span the political map, said Scott Drenkard, an analyst for the organization.
They include conservative states such as Indiana as well as more liberal states like Massachusetts. The most recent state to adopt a flat tax was North Carolina, in 2014.
Flat taxes tend to produce revenue with more stability, Drenkard said, a feature that may prove attractive to Kansas at a time when revenue is volatile. He argued that a single rate also offers protection to taxpayers because if lawmakers want to raise taxes, they must do so on everybody.
Drenkard emphasized that if lawmakers want a “truly flat tax,” any proposal needs to include eliminating the exemption for pass-through business income. Brownback has previously said he won’t accept the full elimination of the exemption, which he calls his small business policy.
“That’s a really important thing that needs to be talked about,” Drenkard said.
The disadvantages of a flat tax outweigh the benefits, said Michael Leachman, director of state fiscal policy at the Center for Budget and Policy Priorities, a left-leaning think tank in Washington. A flat tax often amounts to a tax break for individuals who were in the top brackets and a tax increase for those in the lower bracket.
Progressive income tax systems – where rates increase as income increases – create a system where taxes are assessed based on someone’s ability to pay, Leachman said.
“A thousand dollars means a lot more to a family that’s having trouble putting food on the table than it does to a millionaire,” Leachman said.
A question of fairness
Sen. Julia Lynn, R-Olathe, said a flat tax is “probably the fairest way” to go.
“Flat is fairer,” Lynn said.
The Legislature could maybe look at a flat tax during great economic times, said Sen. John Doll, R-Garden City. But now is not the right time, he said.
Commodity prices in Kansas are low, which poses a challenge to the state’s economy. Revenue to the state also has fallen below projections over the past two years.
“What we need to do is revert back and have three brackets at least and a higher upper end and low lower end,” Doll said. “That’s the most fair tax system.”
Contributing: Hunter Woodall of the Kansas City Star