Kansas Governor Laura Kelly’s Council on Tax Reform met this week, the second of their meetings, to gather more information that can guide them in bringing recommendations to the Governor for a comprehensive overhaul of the state’s tax system. The council will bring a few preliminary recommendations before the 2020 legislative session but will continue meeting throughout 2020 to bring comprehensive reform recommendations prior to the 2021 legislative session. So far, they have been referring to their work for this year as gathering the “low hanging fruit” – what are some of the easier-to-achieve issues that will benefit Kansas taxpayers.
The two-day meeting began with an overview of Senate Bill 22 from the 2019 legislative session. This bill, which was vetoed by Governor Kelly, was written to grant large tax breaks for corporations but also included a sales threshold under which out-of-state and online retailers would have to collect and remit sales tax, a reduction in the food sales tax from 6.5% to 5.5%, and a provision allowing Kansans to itemize deductions on their Kansas income tax form even if they don’t on their federal income tax form.
Much of the discussion of the bill during the session centered on the issue of “conformity” of the Kansas Income Tax Code with the Internal Revenue Code (IRC). As a “rolling conformity” state, when a change is made to the IRC, the Kansas code conforms to it. This makes tax filing easier because one’s federal return matches the state return. It also allows the state to let the Internal Revenue Service flag problems and be the “police” when it comes to review.
With IRC changes passed by the Trump administration, businesses had to pay taxes on certain overseas income. Under conformity, they were then required to do the same in Kansas. Not wanting to pay more state taxes, they asked the legislature to “decouple” from the IRC. You should understand that under the Trump business tax cuts, even with having to pay more on overseas earnings, businesses saw tax reductions on the federal level. Even with having to pay the Kansas taxes, they would still be paying less than they were. The Kansas tax was a partial offset to the large cuts gained on the federal level.
The Trump bill also doubled the standard deduction for individual taxpayers; meaning, many of those taxpayers could no longer itemize deductions. They would be better served to simply take the standard deduction. Under conformity, if one does not itemize on the federal form, one can’t on the state form. And without an increase in the state’s standard deduction, some individual taxpayers found themselves paying more in state income taxes. There are two ways to handle this: One is to decouple and allow deductions on the state form; the other is to raise the state’s standard deduction. SB 22 proposed the former.
Decoupling would benefit only about 14% of mostly high income individual taxpayers. Raising the standard deduction would benefit more taxpayers, particularly middle and low income earners.
Another challenging issue is what to do about the state’s very high food sales tax. Of the 14 states that tax the sale of food, only Mississippi has a higher rate than Kansas. But the rate you pay in Kansas can become quite high once local sales taxes are added in.
SB 22 proposed reducing the state sales tax on food from 6.5% to 5.5%. Once again, the research presented at this meeting shows that such a move disproportionately benefits the wealthy. The benefit is strongly correlated with income and family size.
Kansas has, since 1978, utilized either a food sales tax refund or credit to offset the impact of the tax on a targeted population. The intent has always been to focus the tax relief on those who need it the most and was tied to various combinations of income, age, and disability. After enacting the first program in 1978, changes were made in 1986, 1997, 1998, 2000, 2001, 2002, 2006, 2010, 2012, 2013, and 2015. In 2012 it was repealed for tax year 2013 as a “pay for” for the Brownback tax experiment, letting low income people help pay for tax cuts for the wealthy.
At times it has been a tax credit; meaning, it offsets your tax liability. If you owe more in taxes than the credit, you get all the credit but if you owe less than the credit, you only get as much as your tax liability. At other times it has been a refund; meaning, the individual gets the whole benefit regardless of tax liability.
Again, the program impacts different taxpayers in dramatically different ways based on a multiplicity of factors. The Council is now wrestling with whether it is better policy to simply reduce the rate or to target relief to those who need it most while reducing the disparities in the impact on individuals.
Finally, the “Wayfair” issue was revisited in light of a recent Attorney General’s opinion.
Under the Wayfair U.S. Supreme Court case, states are now allowed to demand that out-of-state and online retailers collect and remit Kansas sales taxes even if they do not have a physical presence in Kansas. Some states have set a sales threshold which would trigger the requirement. SB 22 would have set this at $100,000; meaning, an online retailer would not have to collect sales tax until their sales in Kansas hit $100,000. Since SB 22 was vetoed, Kansas has no threshold. What Kansas does have is a 2003 law calling for the collection of such sales taxes – a law that could not be enforced until the Wayfair decision.
The Kansas Department of Revenue notified retailers that state officials expected them to comply. Conservative Republican legislative leadership called for an Attorney General’s opinion saying the Department of Revenue had overstepped their authority. AG Schmidt sided with the conservatives and opined that KDOR could not do this despite the fact that there was a law on the books allowing it.
KDOR responded during this meeting. Among their response points were the following:
- The only holding in the Wayfair case was that the physical presence requirement established in National Bellas Hess v. Illinois Department of Revenue and upheld in Quill v. North Dakota was incorrect and those cases were overruled.
- Wayfair did not expressly hold that a statutory “safe harbor” based on the value of goods or services sold or number of transactions is required by the Commerce Clause.
- K.S.A. 79-3702(h)(2)(A)(vii), enacted in 2003, provides that a retailer shall be presumed to be doing business in the state if the retailer conducts any activities in the state that are significantly associated with the retailer’s ability to establish and maintain a market in the state for the retailer’s sales.
- K.S.A. 79-3702(h)(2)(D), enacted in 2003, further provides that this presumption may be rebutted by demonstrating that the activities of the retailer in the state are not significantly associated with the retailer’s ability to establish or maintain a market in this state.