Many people likely question Gov. Sam Brownback’s goal of overhauling the Kansas tax system next year and lowering income taxes. How could he reduce taxes when public schools and social services are underfunded and the statewide sales-tax increase is set to expire in two years?
But state Sen. Dick Kelsey, R-Goddard, has a proposal that would lower tax rates without draining the state’s tax base. It does so by eliminating sales-tax exemptions, and it should be a model for Brownback’s plan.
Brownback recently said that his administration is reviewing ways to overhaul the state’s tax system and expects to have a plan ready by yearend. He is particularly focused on lowering individual income taxes, which he considers a key to economic growth.
The challenge is that the state already is facing revenue shortfalls. Lawmakers closed a $500 million shortfall in next fiscal year’s budget by making deep cuts to schools and state agencies.
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When the three-year statewide sales tax expires in 2013, the state will lose about $380 million in revenue (though a portion of the tax will continue to pay for transportation projects).
The Kansas Chamber of Commerce pushed a plan this past session to make the sales-tax increase permanent and use the revenue to offset reductions in income taxes. When that didn’t gain traction, the House passed a plan that automatically would reduce corporate and individual income-tax rates by the same percentage that general-fund tax revenue increases.
Depending on how quickly the economy rebounds, that approach could take a while to significantly reduce income taxes. It also would restrict the state’s ability to restore funding to education, deal with the unfunded liability in the state’s pension plan, or cover the rising cost of Medicaid.
In contrast, Kelsey’s plan would make immediate, bold tax changes without raiding revenue needed for schools and other important services.
If the state eliminated most of the state’s nearly 100 sales-tax exemptions, as Kelsey proposed, it could use the additional revenue to eliminate state corporate income taxes, eliminate the sales tax on food, eliminate last year’s sales-tax increase, and lower state individual income-tax rates.
Kelsey told The Eagle editorial board last week that the Brownback administration doesn’t share his level of enthusiasm for eliminating sales-tax exemptions. But it recognizes that it will need other sources of revenue in order reduce income taxes, he said.
Brownback should appreciate that eliminating exemptions would make the tax system fairer and flatter and would stop “picking winners and losers.” As is, selected taxpayers are saving $4.2 billion a year through exemptions, worsening the tax burden for everybody else.
There are some concerns about Kelsey’s plan, such as taxing accounting and other professional services. Brownback would need to evaluate the impact of the tax shifts, and he might prefer to focus more on eliminating individual income taxes than on corporate taxes.
But if Brownback has the courage to follow Kelsey’s approach, he can make Kansas more business-friendly without harming state services. That’s a win-win.