Finally, the Kansas Legislature has a tax proposal worth considering.
State Sen. Dick Kelsey, R-Goddard, has proposed a bill that would abolish the sales tax on groceries, eliminate the corporate income tax, and reduce individual income tax rates. To make up for these lost state revenues, Kelsey would apply the sales tax to most services that currently are exempt (for example, accounting, plumbing, electrical, haircuts and taxis) and remove most sales-tax exemptions for state and local governments, schools and charitable agencies.
Health care services and legal fees still would be exempt, but a sales tax would apply to energy bills. According to the Kansas Legislative Research Department, Kelsey's plan would lower the statewide sales tax from 6.3 to 5.3 percent and still generate the same amount of revenue that the state government receives from the existing tax structure.
So why should other state legislators consider Kelsey's plan?
First, the service sector represents 55 percent of Kansas' economy, compared with less than 40 percent in the 1930s when the sales tax was instituted. As the service sector's appetite for government services and infrastructure has grown over the years, the tax burden to support this infrastructure has fallen unfairly on downtown merchants, who have seen sales taxes increase from about 3 to 6.3 percent over the past 25 years. There is something unfair about increasing the sales tax on retail goods when sales in the service sector go untaxed.
Second, expanding sales tax to services eliminates one of the most regressive taxes we have in Kansas, the sales tax on groceries. This insidious tax disproportionately hits the working poor, retired people on fixed incomes and young families, all of whom spend a much greater proportion of their disposable incomes on groceries than most of us. By contrast, a sales tax on services is fairer, having about the same relative impact across income brackets.
Kelsey deserves much credit. Nonetheless, there are parts of his proposal that he may want to consider revising. In particular, his proposal hits state and local governments, school districts and charities, making them pay sales taxes when previously they paid none.
Even though these taxing units will generate more than $400 million for the state's bottom line, as a matter of public policy it's generally not wise for governments to tax other governments. In many instances, this forces the lower-level governments to turn to local taxpayers to foot the tab.
Kelsey suggests that expanding the sales tax to the service sector will enable these local governments to recoup the sales taxes they will pay to the state. If so, then perhaps this is a fair trade-off. If not, Kelsey's proposal should be amended.
Much would still be accomplished if an amended law would focus on lowering the sales-tax rate and repealing the sales tax on groceries and the corporate income tax.
At this stage, Kelsey is unsure of the fate of his proposal. His bill has been introduced in both the Senate and House. The Senate plans to hold hearings in two to three weeks. However, Gov. Sam Brownback's administration has not endorsed his bill, and without the governor's endorsement, the chances of it passing are significantly reduced.
Brownback should throw his weight behind even an amended version of this bill, because it is time to adapt our 1930s sales-tax system to the realities of 2011.