Compound interest.

You know, the pennies that accrue day after day, week after week on your savings account. The concept is one of the few things in life that will allow a man to make money while he walks the beach in Bermuda shorts and black socks.

Einstein was such a fan of the notion that he supposedly said “there’s no force more powerful in the universe than compound interest.”

A few leaders in Lawrence City Hall are beginning to believe him. At least, they’re beginning to think it’s powerful enough to tax.

City Hall staff members recently prepared a report detailing how the city could begin requiring residents to pay a tax on the interest they earn on savings accounts, on the dividends they receive from stocks, and from a few other “intangible assets.”

A state law has been on the books since the early 1980s that allows cities, counties and townships to collect what is called an intangibles tax. More than 100 Kansas communities collect the tax. Lawrence is not one of them, but City Commissioner Boog Highberger said that might need to change.

“I think it could make our tax system fairer,” Highberger said.

Highberger said he thinks an intangibles tax wouldn’t hit low income residents as hard as an increase in the local sales tax rate. The thinking is higher income residents are more likely to have hefty savings accounts or dividend income from stocks or bonds.

Highberger – who spurred the staff report on the new tax – said he’s not yet ready to throw his full support behind the idea. But he likes it enough that he thinks talk of increasing the local sales tax should slow down.

“At this point, I wouldn’t be willing to consider a sales tax increase without first looking very seriously at this intangibles tax,” Highberger said.

The basics

Here’s how an intangibles tax works. The state law allows cities to charge a tax equal to 2.25 percent of the income that residents receive from savings accounts, stocks, bonds and some types of loans. For example, if you’ve loaned your brother-in-law money and are receiving interest payments on the loan, that could be taxable.

Businesses also could be taxed under the idea. The law allows for the tax to apply to earnings received from accounts receivable.

Some types of investments are exempt. For example, earnings from 401(k) retirement plans are exempt. Earnings from U.S. treasury bonds or Kansas municipal bonds also would be exempt.

The tax would mean city residents would have another tax form to file. The county clerk, not the state, would compute how much tax each resident owes based off of the forms filed. The county treasurer’s office then would send out a tax bill by Nov. 1 of each year.

Unlike a sales tax, the intangibles tax does not require a public vote. Instead, city commissioners can simply pass an ordinance creating the tax. Residents, though, can present a protest petition that would force the issue the to a public vote.

One of the tougher items to figure out about the tax is how much money it could add to the city’s coffers. Highberger said his preliminary research showed that a 1-percent intangibles tax could raise about $600,000 per year for the city.

In enacted, Lawrence would be the largest city by far in the state with the tax. In Chase County, a 0.75-percent tax generates just $6,400 per year – or about $2 per every resident in the county. In Ellsworth County, the 0.75-percent tax generated $30,000 – or about $4 per person.

City staff members said they are looking into finding more reliable revenue projections for Lawrence.

Tough sale

It is called an intangibles tax, but several community leaders aren’t sure about that. They know that the tax bill residents would receive would be very much tangible.

Two city commissioners already have said they are skeptical about adding the tax to Lawrence’s landscape.

“In general, I don’t think it is a very good idea,” City Commissioner Mike Dever said.

Dever said the tax may take some burden off the lowest of income classes, but he said it probably would hurt more people than it would help.

“I think what would happen is that it would put the burden firmly back on the middle class, which I think is already hit too hard with taxes,” Dever said.

The middle class would be hit the hardest, Dever said, because the upper class would be more likely to have access to financial planners and attorneys who could structure their investments in ways that would be hidden or exempt from the tax.

City Commissioner Rob Chestnut and Dever said retirees would be hit hard by the tax. That’s because many retirees use their investment earnings to pay their living expenses, and many of them have investments that aren’t in 401(k) plans or other plans that are exempt from the tax.

But Chestnut said he’s also concerned that the tax is an idea that hasn’t taken off with virtually any large city in the state, despite it being available since the early 1980s. For example, no communities in Johnson or Shawnee counties have the tax. Of the 107 cities in the state that have the tax, none appears to be greater than 5,000 people in population. Most are less than 1,000 people in population and are in rural sections of the state.

Chestnut said he’s concerned that if Lawrence becomes the first major city in the state to have the tax, that it could impact people’s decision to move to the city.

“Ultimately, we have to recognize that we operate in a regional economy,” Chestnut said. “I think we would have to ask questions about whether this would create issues for us that would make us less competitive.”

In the mix

Without Dever or Chestnut’s support, the tax could have an uphill battle getting the three votes necessary from the City Commission to become reality. But the idea still could affect discussion about enacting a new sales tax to pay for street repairs and economic development initiatives.

That’s because Highberger has made up a trio of city commissioners – along with Mayor Sue Hack and Commissioner Mike Amyx – who have shown the most interest in a sales tax. If Highberger becomes disinterested in a sales tax in favor of an intangibles tax, that could make putting the sales tax issue on the ballot more difficult.

An intangibles tax also could give opponents of the sales tax an alternative to point to when they are lobbying against a sales tax. David Kingsley – a member of Grassroots Action, a group that has expressed concerns about a new sales tax – said he’d lobby for the intangibles tax.

“I absolutely would campaign for this an alternative to the sales tax,” Kingsley said. “I think so many politicians have been pushing the tax burdens down to the lower income levels. I think this is a way for us to push back.”