How do tax credits and exemptions work in Kansas?
Kansas refuses more than $1 billion every year in potential revenue — money that could help pay for schools, roads and other priorities or be used to lower tax rates.
Through dozens of tax credits and exemptions, Kansas constantly turns down tax revenue — and the amount is growing.
You have probably benefited at one time or another. It might have been a tax-exempt sale of books at a public library or your sales tax-exempt utility bill. Or maybe you work for a business that has received an incentive to build a new facility. The credits and exemptions stretch across many areas of life.
But they are applied unevenly. A Rotary Club in one city might have an exemption that others nearby don’t, for example.
And Kansas lacks the oversight found in many other states. Lawmakers haven’t set clear guidelines for who deserves a credit or exemption. There is no regular review process to ensure credits or exemptions are still warranted.
All told, Kansas grants more than $6 billion in credits and exemptions each year, according to a report last fall from state auditors. The vast majority — about $5.9 billion — comes from sales tax exemptions.
Just over 80 percent of what the state gives away in sales tax exemptions is required by the federal government or needed to avoid double taxation, auditors said in a 2010 review. For example, Kansas has a sales tax exemption for food stamps based on federal law.
That means the state directly controls about $1.2 billion a year in exemptions and credits.
Some of them are obscure: The sale of game birds used in hunting is tax exempt, as is admission to historical and cultural events that occur once every three years.
Others are more significant: Not charging sales tax on utilities affects mosts Kansans and costs the state nearly $200 million a year.
The Eagle obtained lists of credits and exemptions — and the lost revenue associated with each — through a records request to state auditors. The figures in those documents form the basis for this story.
Removing a portion of those credits and exemptions could help generate the $600 million some say is needed to respond to a Kansas Supreme Court ruling that found school funding inadequate. Or it could help pay for other items, like increasing pay for state workers, adding more social workers or investing in the state’s pension system.
Proponents of credits and exemptions say they can spur economic growth and ultimately reduce government spending by encouraging private organizations to perform tasks so government doesn’t. For example, providing a tax credit for a food bank may be less costly than providing government food assistance.
“There are many exemptions that are important to the business community, whether you’re talking about aviation, agriculture, housing or manufacturing. Should we tax the sale of a home? Should we subject fuel to sales tax when we already have a motor fuel tax? That alone would cost consumers $300 million more per year on gasoline,” said Alan Cobb, president and CEO of the Kansas Chamber of Commerce.
“Repealing any of the exemptions would have a direct cost impact on businesses and consumers — and would put Kansas in an even more uncompetitive position than it is today.”
But others say the number of exemptions has ballooned over the years. They wonder whether history would be different if the state had fewer credits and exemptions over the past few years, which included strained budgets and income tax increases in 2017.
"If we had had that kind of revenue coming in, would they have had to do a $1.2 billion retroactive tax increase? Would we be fighting the courts? My take: Yes, because we would have spent all that money anyway. But I’m sure it would be a different picture," said Rep. John Whitmer, R-Wichita.
The credits and exemptions have created a patchwork of tax policy in Kansas.
They cover a vast range of activities and organizations. From farm machinery to coin-operated laundry to alternative fuels, all sorts of industries and products have their own special provision.
▪ Sales of bingo cards are tax exempt.
▪ Materials purchased by contractors and used for the building or repair of non-profit hospitals, schools or state prisons are tax exempt.
▪ A credit is available for the restoration and preservation of historic buildings
In addition, more than 50 organizations have their own exemptions in law.
They include Catholic Charities, the West Sedgwick County Sunrise Rotary Club, Goodwill Industries, and Special Olympics, among others.
At Special Olympics Kansas, a sales tax exemption helps the organization save money that in turn goes toward providing additional services, said spokeswoman Heather Waters. Special Olympics trains health professionals to provide hearing, vision and other health screenings at no cost to athletes throughout the year. Without funding, these services could be negatively affected, she said.
“If the sales tax exemption were to be removed, it would ultimately reduce the scope of services we offer to individuals with intellectual disabilities,” Waters said.
Some of the most prominent credits and exemptions benefit businesses.
A credit for businesses investing in employee training and education cost $51 million. A research and development credit for corporations cost nearly $6 million.
A sales tax exemption on property and services used in constructing or remodeling a business costs about $30 million a year. Another for manufacturing and machinery equipment costs more than $165 million a year.
The Kansas Department of Commerce says its tax credits help spur growth.
"We do know that if Kansas doesn’t have incentives, doesn’t have programs to at least compete with our surrounding states, we’re not going to have an opportunity to showcase our good workforce and our wonderful geographic location and some of the logistics that make Kansas stand out," said Bob North, interim Commerce secretary.
The Kansas Chamber of Commerce says a “critical, thoughtful review” of tax credits and exemptions should be on the table. But the revenue that might come from repealing credits and exemptions should go toward reducing income and sales tax rates and not be spent by government, Cobb said.
Cobb said the issue isn’t about how many tax exemptions Kansas has, but instead the size of government.
“Previous lawmakers have decided the exemptions have a strong economic and competitive reason to exist,” Cobb said.
The number of carveouts in the tax code has been growing.
The number of sales tax exemptions more than tripled between 1985 and 2016, and now stands at more than 100. The number of property tax exemptions grew from 43 in 1985 to more than 100 today.
The amount of revenue Kansas gives up each year has risen even as overall revenue shrunk in recent years.
In 2012, Kansas refused $5.82 billion in revenue. By 2015, the figure was $6.17 billion – an increase of nearly 6 percent.
At the same time, Kansas’s total tax revenue fell about 3 percent.
In some cases, it’s impossible to know how much revenue Kansas is giving up. The state doesn’t disclose how much revenue is lost on a tax credit when fewer than five entities claim the credit.
Kansas forbids the disclosure of tax credit recipients. Not even lawmakers can see who is receiving the credits.
"I think sometimes there’s uncertainty regarding either expanding or eliminating economic incentives because either the legislative body or even those implementing it or the public don’t understand. They’re not sure whether it’s really doing what it’s supposed to be doing," said Rep. Kristey Williams, R-Augusta.
Kansas trails in evaluations
Kansas trails many other states — including its neighbors — in making sure tax incentives are being used well, according to a 2017 report from the Pew Charitable Trusts and a review by state auditors released in October.
Kansas doesn’t regularly produce evaluations of tax incentives, unlike Oklahoma, Nebraska and Missouri. The state also doesn’t have any formal process to provide evaluation results to lawmakers, unlike in those states.
Missouri has changed or eliminated incentives based on evaluations.
Tax incentives can be an effective way to encourage taxpayers to act in ways beneficial to the state, auditors said. But they can be costly and ineffective if they are rewarding behavior that would have occurred anyway.
“To help ensure the state offers an array of cost-effective tax incentives, those incentives should be routinely and systematically evaluated by policy makers,” auditors recommended.
An interim legislative committee that examined tax incentives before session issued a report calling for the creation of a subcommittee that would develop a bill allowing for regular evaluations of tax incentives. No clear timeline for crafting the bill was set.
Sen. Julia Lynn, R-Olathe, said lawmakers feel as if they’re flying blind on tax credits and exemptions. But changing the state’s approach is a long-term process, she said.
Past attempts to constrain the state’s system of tax credits and exemptions have faltered.
An effort to tax services last year to raise $60 million passed the House only to die in the Senate. Previous legislative reviews of credits and exemptions, including the audit in 2010, generated attention but ultimately didn’t produce large-scale changes.
“I think it would be an accomplishment if we just didn’t add any more,” Rep. Kathy Wolfe Moore, D-Kansas City, said of credits and exemptions. “I think that would be a big accomplishment because how many times have we had — I’ve served on the interim committees to take a look (at credits and exemptions) and we’ve never taken one off that I know of.”