Kansans need to question a recent study conducted for the Council of State Taxation by Ernst and Young that ranked Kansas 48th worst on the tax burden placed on new investment.
This is an eyebrow-raiser to leaders in neighboring states who, in a growing chorus, claim that the Kansas tax structure entices firms to move across the border. So what went wrong with this study?
Important tax incentives are missing from the tax-burden calculation. Kansas would rise in the rankings if these incentives were included.
Though the merits of tax credits are hotly debated, any careful analysis of tax burdens must include credits and incentives.
Just ask Cerner Corp. if Kansas' $229.5 million incentive package was a factor in its move from Missouri, or ask Hawker Beechcraft if it values its $40 million incentive negotiated in December 2010.
Including the value of such one-off deals may be impossible for a nationwide study, but any examination of tax climate must include credits, exemptions and incentives that are available to any qualifying business.
Kansas has some potent incentives. Kansas exempts new machinery and equipment from personal property tax, yet this study used a 3.01 percent personal property-tax rate instead of a zero tax rate for Kansas. One program allows firms relocating jobs to Kansas to retain 95 percent of the payroll withholding tax for five or more years. Another program gives firms making new capital investment a 10 percent income-tax credit, a sales-tax exemption and a tax credit for training.
Such state tax credits are so large and plentiful that many expire before they are used. For example, the 2010 Hawker Beechcraft financial statements reported $10.6 million in unused state tax credits, of which $5.5 million soon will expire.
The study has other shortcomings. It uses the property-tax rates of each state's largest city and reports that Kansas' property-tax rates are twice those of California. But the study then uses the same property values for both states, as if it were cheaper to own property in Los Angeles than in Wichita.
Non-tax costs represent a much higher percentage of a business' expenses than taxes, and by ignoring these significant cost differences, the Council of State Taxation model reaches erroneous conclusions.
The model also is too sensitive to changes in economic assumptions. Oregon's No. 2 ranking drops to No. 51, dead last, when the study's authors assume that revenue is from in-state customers. How, other than with flawed assumptions, could the study portray Illinois — a union stronghold with the nation's third-highest state corporate tax rate — as No. 5 and a great place to invest in new business?
This type of study does illustrate the advantages of having a tax system with lower tax rates for all and tax subsidies for none: Outsiders can predict the true tax cost of doing business in Kansas, and all taxpayers are treated fairly.
The study states that the effective tax rate in Kansas is 11.2 percent. But Boeing, which operates in Washington state and Kansas, reported a 1.8 percent statewide income-tax rate on its 2010 annual report.
The Kansas tax code can be made more simple, more equitable and more conducive to growth, but only if reform is based upon complete, unbiased and accurate information. It's unfortunate that this new study clouds the issues.