The Governor’s Council on Tax Reform met this week to discuss possible recommendations for Kansas Gov. Laura Kelly to consider as she prepares for the 2020 legislative session.
Notable in this meeting was the decision by the Kansas Policy Institute to submit written testimony in which they essentially suggest Kansas is on the brink of collapse due to massive tax burdens. In particular, KPI claims these tax burdens are due to the reversal of former Kansas Gov. Sam Brownback’s disastrous tax experiment. Additionally, KPI claims the sales tax increases that were subsequently enacted in a failed attempt to compensate for Brownback’s disastrous income tax cuts add to Kansas’ tax burden.
KPI asserts there is no evidence that the changes made by reversing the Brownback failure are having a positive impact. Let’s put the record straight: There is ample evidence that lowering taxes as Brownback did had a disastrous impact on state services. The results of the lost revenue included crumbling roads and highways, prison riots due to understaffing, cuts to K-12 and higher education, and the near-collapse of the foster care system. Seeing these problems, Kansans voted to change the legislature by electing representatives who promised to reverse the Brownback cuts. Voters then elected Gov. Kelly over Kris Kobach who vowed to double-down on the Brownback experiment.
Presently, revenues have been restored. The state now has school funding that meets constitutional muster in both adequacy and equity, the highway program is no longer under attack (although not yet fully restored), and the Kansas Department of Corrections and Kansas Department for Children and Families are both on the road to restoration.
It is interesting that KPI staffers have argued that it takes time to see the benefits of tax cuts while expecting the benefits of the reversal of the failed Brownback experiment to be evident within a few minutes of the legislative vote.
Despite the reversal of the Brownback experiment, income taxes in Kansas are lower now than they were before Brownback took office. Sales taxes are indeed higher; that’s because Brownback approved two sales tax increases to pay for his failed experiment. But among the first recommendations of Gov. Kelly’s Council on Tax Reform is to provide relief from the food sales tax for low-income Kansans. Another recommendation seeks to restore a program providing local property tax relief.
Council recommendations to Governor Kelly
The Kansas Department of Revenue brought two recommendations to the council based on discussions in their prior meetings. Both have to do with sales tax collections.
The first recommendation is to apply the sales tax to digital assets. Twenty-nine states already do this and others are looking at the issue as digital commerce continues to grow. Under this proposal, the sales tax would be applied to “all sales of digital products and subscription services.” This means that things like digital music and video downloads, e-books, digital magazine and newspaper subscriptions, and streaming services like Netflix would be subject to the sales tax. This offsets the loss of sales tax revenue as sales of books, DVD’s, and CD’s continue to decline. It also provides a level playing field between brick and mortar shops and digital retailers. This recommendation would be expected to raise an additional $30 million per year.
The second recommendation is to require the collection and remittance of sales taxes by marketplace facilitators. Such facilitators are essentially third party entities who facilitate a purchase between a customer and a business. In many online transactions, one deals directly with the business. For example, if you buy a shirt from Lands End, you deal with them directly and they are required to collect and remit sales tax on that shirt. But in some cases, a business will use a third party marketplace facilitator and not collect or remit the sales tax. This recommendation would require those sales taxes to be collected and sent to Kansas. Kansas is one of only five states that does not have this requirement. This recommendation would be expected to raise an additional $32 million per year.
Both of these recommendations were adopted by the bipartisan council and will go to Gov. Kelly for her consideration.
Council members also adopted a recommendation to reinstate the refundable food sales tax credit for low-income individuals and families. This credit had been law until it was repealed as part of the Brownback experiment. The credit would be tied to certain income levels and family considerations. The council had discussed this as well as a simple reduction in the rate on food sales in prior meetings. Research showed that reducing the overall rate gave a much larger benefit to higher-income individuals than those living in poverty and would have a significant fiscal impact.
Another recommendation adopted by the council would fund the Local Ad Valorem Tax Reduction Fund (LAVTRF) which- while in statute- has not been funded for a number of years. This fund provides local property tax relief from the state.
Council members will recommend exempting from local property tax lids those taxes levied in support of local transportation improvements. There is currently a cap on how much local units of government can raise property taxes with an exception for fire and police. This would allow cities and counties to raise property taxes for transportation improvements without running into the cap.
The council agreed to study over the next year the two big items requested by the Kansas Chamber of Commerce: 1) repatriation of overseas earnings and the GILTI provisions, and 2) the issue of decoupling the Kansas Income Tax Code from the IRS Code to allow itemization by individuals even if they can’t itemize on the federal form.
On a motion by former Kansas Budget Director Duane Goossen, council members urged Gov. Kelly and legislators to resist sizable tax cuts. This action would aid in continuing to stabilize the budget while creating an ending balance as well as an emergency fund to deal with unexpected costs to the state.