SALES TAX INCREASE

• Governor’s Proposal: a 20% increase to the 5.3% state sales tax rate for three years to 6.3% that could raise $320 - $351 million per year.
• Each 0.1% increase in state sales taxes raises between $32 - $38 million per year
• Sales tax increases greater than 0.5%, change consumer behavior
• Governor’s Proposal: beginning in 2013, a 0.3% increase for transportation
• Considerations include:
  
  1. The higher the total sales tax rate, the greater the incentive for consumers either to not make purchases, to make purchases in a bordering state or via internet
  2. Damage the competitiveness of many businesses, particularly in border counties such as Johnson County.
  3. Therefore, state, city and county tax collections would decrease along with the level of services that could be provided
  4. The higher the total sales tax rate, the less additional sales tax “capacity” is available for future needs statewide or locally.
  5. Sales tax is paid by both residents and non-residents making purchases in Kansas.
  6. Sales tax is paid by everyone so there is a wide sharing of the tax burden
  7. Sales tax is regressive.

• Democratic legislative leadership has publicly indicated they plan to propose an increase in individual income taxes.
• Income taxes are paid by less than half of the public, so the tax burden would be unevenly distributed on small group of people through higher rates.
• The primary means of increasing income tax revenues include:
  1. Increasing rates on current tax brackets.
  2. Adding new tax brackets at upper at upper income levels, subject to higher rates.
  3. Adding an additional surcharge to income taxes owed under existing law
• There are currently three individual income tax brackets in Kansas:
  1. The top bracket taxes income over $30,000 (over $60,000 for married joint filers) at 6.45% of excess over $30,000 (excess over $60,000 for married joint filers.)
  2. The middle bracket taxes income not over $30,000 (not over $60,000 for married joint filers) at 6.25%.
  3. The lowest bracket taxes income not over $15,000 (not over $30,000 for married joint filers) at 3.5%.
• Adding a new tax bracket on taxable income over $100,000 (over $200,000 for married joint filers), taxed at 7.5% of excess over those thresholds, would raise roughly $80 million in new state revenue.
• A 1% surcharge on individual income taxes would raise roughly $27 million in new state revenue.
• Key Considerations include:
  1. Forms of business that are not a “traditional C” corporation, such as sole proprietorships, partnerships, S-corporations, and LLCs, typically pay business-related income taxes on flow-through income via the individual income tax system, often at upper income levels. As a result, efforts to tax the “wealthy” actually impact many small and medium-sized employers…the very businesses the economy relys on to create and retain jobs.
  2. Higher income tax rates would make Kansas a less attractive place to attract or retain businesses, thereby, damaging economic development and employment growth.
  3. Higher income taxes would reduce taxes collected in the long-run due to slower state economic growth and exodus of business
  4. Income taxes could not be collected quickly enough to provide a solution to the state’s immediate budget crisis.
  5. Since less than half of the public pays income taxes, there is little less public interest to control future governmental spending or tax levels.

• Despite the rhetoric that there are 99 sales tax exemptions with 4.3 billion in revenue, the vast majority of all sales tax exemptions are:
  1. Required by federal law
  2. Needed to avoid double taxation (such as motor fuel)
  3. To avoid taxation of governmental entities (such as schools, cities, etc.)
  4. To ensure that goods are taxed only at the final point of sale (rather than each ingredient or component part), as all states do; otherwise, there would be a massive compounding of cost at every level of input in business process making Kansas’ goods and services completely uncompetitive in the regional, national and global marketplace.
• These above exemptions alone represent $3.4 billion of the 4.3 billion of touted total potential revenue.
• Less than $800 million in sales tax exemptions have been enacted as a matter of public policy, and there are serious legislation and attempts to place sales taxes collections on the sales and purchases of:
  1. Churches, charities and benevolent organizations: estimated at $17 mil
  2. Non-profit organizations and associations (fund raising events for Rotary, TLC and the like): estimated at $2.1 million
  3. Residential utilities: estimated at $134 million
  4. Labor Services (examples: some construction, repair, attorneys, doctors, engineers, architects…): estimated at $182 million
  5. Public/private K-12 schools, youth activities and education: estimated at $52 million
  6. Prescription drugs: $70 million
• Key Considerations
  1. When granting exemptions, policymakers must consider whether the benefit to the public is worth the tax revenue that is lost.
  2. Faith-based, non-profit and benevolent organizations are usually providing services to the most needy and vulnerable of society (the poor, the elderly, the disabled, the homeless, etc.) and charging taxes would reduce their ability to provide these services.
  3. Many of these faith-based, benevolent, non-profit services are provided by volunteers with no cost for the time or talent
  4. Many of these services are provided with donated food, shelter, rent and supplies
  5. The expense to the taxpayers would likely increase. How many government agencies provide the same services with donated items, supplies, office space or volunteers’ time and talent?
  6. Charitable or religious contributions, whether cash or in-kind, are donations purchased and/or given with funds already that have been taxed at some level once or twice.

• Currently: state cigarette tax in Kansas is 79-cents per pack and the wholesale tobacco tax is 10%.
• Governor has proposed a cigarette tax increase of 55-cents per pack, bringing Kansas up to the national average of $1.34 per pack, and a wholesale tobacco tax increase up to 40%.
• The proposed cigarette tax increase would raise about $52 million
• The wholesale tobacco tax increase would raise about $17 million, together an estimated $69 million in additional state revenue.
• Key Considerations include:
  1. The higher the tax rate, the greater the incentive for consumers either to stop making purchases or to make purchases in bordering states. 40% of Kansas’ population lives within 50 miles of a bordering state.
  2. That would lower state revenues and damage the competitiveness of some businesses, particularly in border counties.
  3. Currently, the state cigarette tax in Missouri is 17-cents per pack, second lowest in the nation.
  4. Raising cigarette taxes will be a short-term fix as the experience of other states has shown dramatic transitions in purchasing to lower tax states.
  5. Higher cigarette taxes could theoretically lead to less use and lower the health expenditure costs of subsidizing smokers poor health.

• Kansas imposes a liquor gallonage tax upon the person who first manufactures, sells, purchases, or receives the liquor (for example, a liquor store owner or drinking establishment.)
• Liquor gallonage tax rates have not been increased since 1977.
• Kansas also imposes a liquor enforcement tax at a rate of 8% (generally in lieu of sales tax) on the gross receipts from the sale of liquor to 1) consumers by retail liquor dealers and 2) clubs, drinking establishments, and caterers by distributors.
• The liquor enforcement tax rate has not been increased since 1983.
• A bill proposed in the legislature would double the liquor enforcement tax rate from 8% up to 16% and double the current gallonage tax rates as follows:
  1. Beer and Cereal Malt Beverages: $0.18/gallon up to $0.36/gallon
  2. Wine: $0.30/gallon up to $0.60/gallon
  3. Alcohol and Spirits: $2.50/gallon up to $5.00/gallon
• The liquor gallonage tax rate increase would raise about $22 million and the liquor enforcement tax rate increase would raise about $35 million, together about $57 million in additional state revenue.
• Key Considerations:
  1. The higher the tax rate, the greater the incentive for consumers either to stop making purchases or to make purchases in bordering states.
  2. That would damage the competitiveness of some businesses, particularly in border counties. (For example, Missouri reported a substantial spike in liquor tax revenues immediately following a massive statewide increase in Illinois).
  3. Potentially reduced consumption of alcohol may improve public safety, improve public health, and reduce health care-related expenditures.

• Kansas does not currently impose a tax on sweetened beverages and concentrates; about 30 states do.
• A bill proposed in the legislature would impose a new $0.01 per teaspoon tax on sweetened beverages.
• A “sweetened beverage” is defined as any sweetened nonalcoholic beverage including soda water, ginger ale, root beer, colas, any other flavored beverage commonly referred to as soda or soft drinks, and fruit or vegetable drinks with less than 10% real juice.
• It would not include sodas sweetened entirely with artificial sweeteners that do not add calories to the drink, infant formula, weight reduction drinks, and water to which no natural sweeteners have been added.
• The average amount of sugar in a 12-ounce sweetened beverage is between 7-12 teaspoons, making the proposed tax about 10-cents/can for soft drinks.
• The average per capita consumption of sweetened beverages is about 37.4 gallons per year, or about 4,000 teaspoons of sugar – about $40 a year per person.
• As proposed the new sweetened beverage tax would raise an estimated $90 million in additional state revenue.d
• Key Considerations include:
  1. The new tax may cause consumers either to stop making purchases or to make purchases in bordering states. That could lower state sales tax revenues.
  2. Potentially reduced consumption of sugary beverages may improve public health and reduce health care-related expenditures.
  3. The new tax would be passed on to consumers or absorbed by beverage manufacturers, which may damage the competitiveness of some businesses or cause manufacturers to move their operations to another state, impacting other state revenues and jobs in Kansas.