Who pays taxes, who doesn't may shift

Maybe you won't pay taxes on food at the grocery store. You might pay taxes on utilities instead.

Maybe businesses won't pay state income taxes anymore. Some services, like accounting and engineering, might become eligible for sales taxes.

Who pays taxes and who doesn't is likely to be a focus for state lawmakers next session. And it's a topic for candidates this fall.

Both major-party candidates for governor say they want to reform the tax code, easing taxes on businesses to grow the economy.

In the Legislature, Sen. Dick Kelsey, R-Goddard, has proposed overhauling the system. His plan has pieces that generate support, but it also would tax services and eliminate special exemptions on many things, including utilities and Girl Scout cookies.

"It is not a complicated plan. It is a plan that is going to take some courage to execute," Kelsey told a tax committee last week when he unveiled it.

It is unlikely that Kelsey's idea will be exactly what lawmakers end up debating, but the plan offers a snapshot of various options.

Kelsey's proposal would:

* Eliminate the corporate income tax.

* Eliminate most sales tax exemptions except those on medical services.

* Eliminate the state sales tax on groceries.

* Reduce the state sales tax.

* Start taxing services such as those offered by accountants and engineers.

"We no longer have an economy based on objects. Our economy is based on services," Kelsey observed.

Corporate income tax vs. service sales tax

Eliminating the sales tax on food finds favor in many circles. Eliminating the corporate income tax — which generates $255 million annually from registered corporations in the state — also has its supporters.

Some states such as South Dakota have eliminated the corporate income tax and attracted new businesses, though mostly from the service sector, said John Wong, chairman of the Department of Urban and Public Leadership at the University of North Texas at Dallas. Until recently, Wong worked at Wichita State University's Hugo Wall School of Urban & Public Affairs and served on Kansas' revenue estimating group.

But proposals for other taxes to offset the losses from food or corporate taxes could become political hot potatoes.

Take the idea to tax services from folks such as accountants, engineers and architects.

No other state taxes those services, Wong said.

"The problem is, you don't want to be the one that steps off that cliff because you will run everyone out of your jurisdiction," he said.

For most services, leaving a state is a matter of moving offices, not moving factories, so they are more likely to leave if the tax structure becomes unfavorable, he said.

This is particularly a problem for counties on state lines such as Johnson County, he said. Its economy is strongly tied to service industry companies. All they would have to do to avoid a tax is move offices across the state line to Missouri.

Such a tax could counteract the idea of getting rid of the corporate income tax to help business.

"It is taking it out of one hand and putting it back with the other," Wong said.

It also means some natural supporters of reducing taxes might be reluctant to support changes.

The Kansas Chamber of Commerce has advocated eliminating the corporate income tax for several years, said Kent Beisner, president and CEO for the chamber.

Kansas ranks 32nd on the Tax Foundation's 2010 State Business Tax Climate Index. That's in the neighborhood of Oklahoma and Nebraska (31 and 33, respectively), but far behind Colorado and Missouri (13 and 16).

Eliminating the corporate income tax would make Kansas more competitive, Beisner said.

But the chamber is not as excited about the idea of replacing that money with a tax on services, he said.

Several chamber members are involved in the service industries that would be affected, he said.

Until there is a bill outlining the details, Beisner said the chamber wouldn't take a specific position on any proposal.

Governor candidates take on taxes

Both major-party candidates for governor have touched on taxes in their plans for the state's future.

U.S. Sen. Sam Brownback, the Republican candidate, says the tax code needs to be reformed, though he has not offered specifics.

"Capital and jobs flee to states with low overall tax rates and the right mix of taxes," his campaign website notes.

If elected, Brownback would study any proposals to change the state's tax structure, said spokeswoman Sherriene Jones-Sontag by e-mail.

"However, spending restraint must precede any changes to tax policy," she wrote. "That is why one of the first actions taken by a Brownback Administration will be to issue a state general fund spending freeze."

After a campaign stop last week, Democratic candidate Tom Holland, a state senator, said Kansas' tax codes need to be re-examined — including possibly eliminating the corporate income tax.

"We need to go back and look at the way we have done business when it comes to tax policy," he said.

He does not advocate taxing services but said that the state's economy has changed over time, and the tax base needs to be sustainable.

"It has to come down to, 'If I eliminate that, what is the benefit? And where do we plug the hole if we pull that away?' " he said.

He has advocated eliminating the sales tax on groceries in the past.

Although there are excellent reasons to maintain some of the sales tax exemptions, he said, "some of those were granted, I believe, willy-nilly."

The state tax code includes about 100 sales tax exemptions including for coin-operated laundries, and a 1970s-era exemption for utilities. Some, such as an exemption for lottery tickets, would need to remain because of interstate agreements. But eliminating the rest could add $795.6 million to state revenues.

Holland has proposed setting up a commission to study tax changes. The state attempted something similar last year when the Kansas Advisory Council on Intergovernmental Relations recommended eliminating most of the state's sales tax exemptions.

That idea floundered, and no changes were made.

Taxes are a hot election topic

Other candidates hear about taxes frequently as they go door to door in Wichita.

"Everybody wants good schools and an equal number of people don't want to pay whatever the tax is," said Jane Byrnes, a Democrat challenging Republican Rep. Gene Suellentrop in the 105th legislative district in northwest Wichita.

She consistently hears about peoples' concern for schools and taxes — mostly increasing property taxes, she said.

Byrnes said she supports the temporary 1 percentage point sales tax increase lawmakers approved last session.

Suellentrop could not be reached for comment. In his responses to The Eagle's voter guide questions, he said he would look at avenues to repeal the sales tax increase. He also said "a more favorable tax climate for businesses will begin to improve the job outlook for everyone." He suggested some sales tax exemptions could be eliminated to offset reductions in other taxes.

Rep. Phil Hermanson, R-Wichita, running for re-election in the 96th District in southwest Wichita, said there is merit in examining which entities receive sales tax exemptions and how they are granted.

"Some of the exemptions are crazy. I think pretty much everyone would agree on that," he said.

Hermanson likes the idea of eliminating sales taxes on groceries but says the money would have to be made up from elsewhere.

"I'm not a fan of reducing the sales tax without a plan to fill the money," he said.

His opponent, Democrat Brandon Whipple, also likes the idea of eliminating the sale tax on groceries.

"I hate the idea that we are taxing people on food, something that is a necessity," he said.

Whipple said he wants to help create an environment that fosters economic growth in Kansas but that he opposes giving tax breaks to companies that move jobs out of the state.

Eliminating taxes is not so simple

Although many lawmakers say the state should consider eliminating specifically named sales tax exemptions, doing so is not a simple matter.

Lawmakers considered it during the 2010 session as one way to plug a budget deficit. Ultimately, they decided they didn't want to be tagged as the ones who made churches, the Girl Scouts, YMCA and other groups pay sales taxes.

Kelsey acknowledged his part in the exemptions. "I've voted for some of these sales tax exemptions. I don't know any of us who have served for very long who haven't," he said.

But there is a great deal of inconsistency in who has received exemptions, he said.

During the past legislative session, some people dubbed the idea the "Girl Scout cookie bill" because it would tax cookies, which are the organization's main fundraiser.

The Girl Scouts of Kansas Heartland, which includes Wichita, would have to pay about $250,000 to cover the cost of the sales tax, said spokeswoman Cat Poland.

The organization is reluctant to raise the price of cookies to absorb the cost. Other areas that have done so saw up to a 20 percent drop in sales, she said.

It's hard to say what lawmakers will end up with. It's easy to eliminate taxes but difficult to assess new ones.

The state budget has been cut more than $1 billion since 2009. There are no more obvious places to reduce state spending, Wong said.

So eliminating the sales tax on food or the corporate income tax means shifting the burden to replace the money, he said.

"It's a huge political football and anytime you are talking about taxes it is by definition never a win-win situation because you are always reaching in and taking the money out of someone's pocket who doesn't want it taken out," he said.