Though the effort is unlikely to get far, it is good that state lawmakers are reviewing state sales tax exemptions.
One of the best – and fairest – ways to increase tax revenue is to reduce the number of tax exemptions. And sales tax exemptions are costing the state a fortune – about $6 billion a year.
The House Taxation Committee has been discussing the possibility of eliminating some exemptions – or at least taxing some exempted services and purchases at a lower sales tax rate.
Some exemptions may make economic sense. For example, eliminating the exemption on legal and accounting services could put Kansas at a competitive disadvantage, as other states don’t tax those services.
But many other exemptions are arbitrary and the result of some business or group persuading lawmakers to add a new exemption. That’s why the number of exemptions increased from 30 in 1985 to more than 100 today.
Current exemptions the committee is reconsidering include labor on residential construction and remodeling, the sale of bingo cards, customized computer software, Lottery tickets, farm machinery and equipment, and services by an advertising agency.
The revenue generated by removing some of these exemptions could help plug the state’s budget hole, which is currently about $900 million over the next 17 months. The additional revenue also could be used to lower the sales tax rate on food – which, when combined with local sales taxes, is the highest in the nation.
Another option is to lower the overall sales tax rate. According to a new report by the Tax Foundation, Kansas’ combined state and average local sales tax rate of 8.62 percent is the eighth highest in the nation.
But such efforts never get anywhere because the groups that benefit from the exemptions lobby to keep them in place. That’s already happening this session, as farmers, home- builders and other industry groups are mobilizing to defend their exemptions.
“There is absolutely no question that these exemptions have been instrumental in making it possible for more people to become homeowners,” Wes Galyon, president and CEO of the Wichita Area Builders Association, told lawmakers.
Perhaps the best way to reduce exemptions is an idea proposed by former Kansas revenue secretary Nick Jordan: Appoint an independent panel to review the exemptions and make a recommendation, similar to the process the military and Congress use to recommend military base closings. The Legislature would then be allowed only an up-or-down vote on the entire proposal.
In the meantime, favored groups are saving millions on sales taxes while the state is struggling to pay its bills.