Jan 31, 2023

Analysis: Kansas Chamber’s flat tax proposal costs $1.5B

Posted Jan 31, 2023 2:00 PM
In his assessment of the Kansas Chamber's flat tax proposal, state budget director Adam Proffitt calculated the annual cost to be about $1.5 billion when fully implemented. (Rachel Mipro/Kansas Reflector)
In his assessment of the Kansas Chamber's flat tax proposal, state budget director Adam Proffitt calculated the annual cost to be about $1.5 billion when fully implemented. (Rachel Mipro/Kansas Reflector)

By SHERMAN SMITH, TIM CARPENTER and RACHEL MIPRO
Kansas Reflector

TOPEKA — Assessments by the Kansas budget director and an independent tax policy institute Monday showed the flat tax proposal by the Kansas Chamber would reduce the state budget by $1.5 billion per year and primarily benefit the state’s most affluent wage earners.

The Kansas Chamber, which wields substantial influence in the Statehouse, introduced a plan setting an individual income tax rate of 5% for annual income above $15,000. Under current law, the state’s graduated individual income tax rates stand at 3.1% for income under $15,000, 5.25% for income between $15,000 and $30,000 and 5.7% for income above $30,000. The income amounts are doubled for couples filing jointly.

In addition, the Kansas Chambers proposal, introduced in House Bill 2061 and Senate Bill 61, would establish a 5% corporation tax rate on taxable income. The current assessments on corporate income in Kansas: 4% on taxable income with a 3% surtax on taxable income in excess of $50,000. The bill also would cut by more than 50% the surtax rate for banks, trusts and savings and loan associations.

Provisions in the bill also would create a procedure to allow individual and corporate income tax rates to decrease in future years.

Adam Proffitt, director of the state budget, released an evaluation of the bill’s financial impact on the state treasury. In the fiscal year starting July 1, the legislation would slash state revenue by $428 million. In the second and third years, the reductions from current revenue would total $1.45 billion and $1.54 billion.

Those figures are consistent with an analysis from the Institute on Taxation and Economic Policy, a Washington, D.C.-based nonprofit that provides research on state and federal tax policies. Kansas Reflector asked ITEP for an analysis of the Kansas Chamber’s proposed legislation.

ITEP estimated the top 1% of Kansas wage earners would see an average tax cut of $11,510, while the bottom 20% would receive a $192 tax cut under the Kansas Chamber’s plan.

Overall, the institute predicted 49% of the individual income tax reduction in the Kansas Chamber’s proposals would go to the richest 20% of Kansans. The bottom 20% of earners would receive 4.1% of the tax reduction.

“Kansas lawmakers have a well-documented history with irresponsible and regressive tax cuts,” said Dylan Grundman O’Neill, a senior analyst at ITEP. “Instead of prioritizing more tax cuts, they should instead help middle- and low-income Kansans by protecting state investments in key economic building blocks like good schools, safe roads and thriving communities.”

Kansas Chamber lobbyist Eric Stafford outlines priorities that include a flat tax proposal during a recording of the Kansas Reflector podcast earlier this year. Stafford introduced legislation that would lower the income tax rate to 5% for all individuals. (Sherman Smith/Kansas Reflector)
Kansas Chamber lobbyist Eric Stafford outlines priorities that include a flat tax proposal during a recording of the Kansas Reflector podcast earlier this year. Stafford introduced legislation that would lower the income tax rate to 5% for all individuals. (Sherman Smith/Kansas Reflector)

More than 80% of the business tax cut described in the Kansas Chamber’s bill would go to out-of-state shareholders of large corporations.

ITEP said the annual $1.5 billion price tag of the tax reform legislation would deplete the state’s current surplus and jeopardize state services in future years.

The tax proposal is among the Kansas Chamber’s  top priorities this year in the Statehouse.

Eric Stafford, the Kansas Chamber’s top lobbyist, said the organization’s legislative agenda, with heavy emphasis on tax policy, was designed to improve the state’s economy.

“We need to become more competitive,” Stafford said. “We need to grow. We need to attract more business investment. We need to attract individuals here. And, it’s not just necessarily income taxes. We’re the sixth-highest cellphone tax burden in the nation.”

Sen. Ethan Corson, a Fairway Democrat, said the state can’t afford the Kansas Chamber’s flat tax plan — “not even close.”

“I think it’s dead on arrival, or it should be dead on arrival,” Corson said.

Corson said the Kansas Chamber’s proposal would require the “gutting” of transportation funding, failing to meet obligations to the state employee retirement system, and not constitutionally funding public schools.

Instead, Corson said, tax policy should be focused “on the folks who need it,” meaning lower-income and middle class Kansans.

“We do have the ability to cut taxes,” Corson said. “Just like every other legislator in this building, I would love to tell my constituents that we are cutting their taxes. I think there is room in the budget to do it.”

Sen. Ethan Corson, D-Fairway, says the Kansas Chamber’s flat tax plan should be considered “dead on arrival.” (Sherman Smith/Kansas Reflector)
Sen. Ethan Corson, D-Fairway, says the Kansas Chamber’s flat tax plan should be considered “dead on arrival.” (Sherman Smith/Kansas Reflector)

Rep. Adam Smith, a Weskan Republican who chairs the House Taxation Committee, said the state wouldn’t be able to afford a $1.5 billion budget cut unless all other tax cuts, including the continued reduction of the sales tax on food, were off the table.

“And even if that happened, budget cuts would also likely be needed to fund the income tax cut,” Smith said.

Smith said he supported the idea of implementing some form of flat tax to simplify the tax code and get rid of progressive tax policies that targeted wealthy Kansans. An alternative solution, he said, would be to try the flat tax rate at a higher percentage.

“If the 5% rate is not affordable all at once, perhaps we could adopt the flat rate concept at a higher rate to make it more affordable and work our way down to 5%? We’ll see what the economic outlook and data shows,” Smith said.

Smith also feels that Kansas needs to reduce its corporate tax rate in order to attract more businesses to Kansas.

“Not everyone is a Panasonic that can negotiate special incentives because they are so large,” Smith said. “We need small businesses in our state, too.”

Mike Pirner, spokesman for Senate President Ty Masterson, said Masterson favors a flat tax rate but hasn’t endorsed any specific legislation this session.

Masterson “has consistently voiced his support for structural reform that includes moving Kansas to a single rate, with sufficient exemptions so all taxpayers benefit,” Pirner said. “Lowering taxes on those making $15,000+ a year, by definition, is lowering taxes on middle-class families who have felt squeezed by inflation — whether it be on higher rent, higher gas prices, or more expensive trips to the grocery store.”

In the State of the State speech earlier this month, Gov. Laura Kelly proposed quickly eliminating the state’s 4% sales tax on groceries and raising the income tax exemption related to state taxation of Social Security benefits.

Kelly warned she wouldn’t sit idly while the 2023 Legislature pushed through tax cuts damaging to the state’s fiscal condition. She refreshed the memory of legislators to what happened in 2012 when then-Gov. Sam Brownback aggressively slashed state income taxes.

The result wasn’t a surge in economic development. Instead, the changes gutted the state treasury and brought on years of budget cuts. Under what Brownback referred to as a tax “experiment,” the state slashed agency services, took on debt, borrowed heavily from the highway fund, skipped payments to the state employee pension fund, shorted payments to foster care agencies and lowered funding for public schools to unconstitutional levels.

Brownback subsequently signed legislation blocking a scheduled reduction in the state sales tax from 6.3% to 5.7%, putting the rate at 6.15% to resupply the treasury. In 2015, Brownback signed a bill hiking the state sales tax to 6.5%.

The bulk of Brownback’s tax program was repealed by the Republican-led Legislature in 2017 over the GOP governor’s veto of the bill.

“Let me make myself clear,” Kelly said, “I will stand against any irresponsible tax proposals that erode that foundation. We have been there before. We know where it leads. And we can’t go back. Not to debt. Crumbling roads. An overwhelmed foster care system. And perhaps most devastating of all, underfunded schools. We cannot go back to the days where financial irresponsibility here in Topeka robbed our Kansas students of opportunity.”