When a plumber is needed at Watkins Community Museum of History, the bill doesn’t include sales tax. Neither does the bill for the boxes the museum purchases to store its collections.
For the hundreds of thousands of Girl Scout cookies sold in Kansas each year, the $3.50 price tag doesn’t include a state sales tax. Coin-operated laundry services and bingo cards receive sale tax exemptions, too.
Since the 1990s, there has been an explosion of tax exemptions. For sales tax alone, Kansas has a list of more than 100 exemptions, which means each year the state foregoes about $4 billion.
The biggest chunk comes from the tax not paid on raw materials that go into making products, such as the steel Boeing purchases to make an airplane.
“Random” is how Douglas County United Way Director Erika Dvorske describes the way the state picks and chooses who is exempted from its taxing system.
For the record, the United Way isn’t exempt from paying sales tax. But state statute specifically names more than 20 organizations that are, such as Habitat for Humanity, Special Olympics and the Missouri-based nonprofit Wayside Waifs.
“They’ve been giving (tax exemptions) to anyone who asks for them,” said Kent Eckles with the Kansas Chamber of Commerce.
In the wake of another round of state budget slashing — including $260 million made by Gov. Mark Parkinson last month — one top-level state official said it’s time to review where these tax breaks are going.
“It’s a question of priorities and balance. In a time when we can’t fund schools and in a time when we can’t meet obligations to even keep prison beds opened, I don’t know if we can afford to keep these,” Kansas Department of Revenue Secretary Joan Wagnon said.
Out-of-whack tax code
A review from Kansas Advisory Council on Intergovernmental Relations, a group within the Department of Revenue, recommended repealing tax exemptions that could save the state close to $200 million a year. Those suggestions include:
• Setting a moratorium on new tax exemptions and an automatic three-year sunset for any exemptions granted.
• Repealing all exemptions to specific organizations. The exemption should either be replaced with one to include all similar organizations or be revoked.
• Tax all admission to recreation activities.
• Require all nonprofits and religious organizations to pay sales tax on purchases.
• Repeal the sales tax exemption on electric, gas and heat utilities and water used for residential and agriculture purposes. If repealed, the these two exemptions would bring in $140 million of revenue.
“We put these in the tax code and then we forget about them,” Wagnon said of the long list of exemptions. “They are tax expenditures. They are expenditures just like the appropriation process. And we ought to be examining these on a regular basis.”
In the past six weeks, Wagnon has given more than a dozen talks across Kansas about the state’s out-of-whack tax code.
It’s an issue that has resonated with other public officials, including Lawrence public schools Superintendent Rick Doll, who learned of another $3.3 million worth of state cuts last month. That lost funding spurred talks of school closings.
“It’s gotten out of hand,” Doll said of the tax exemptions, which he believes have had a negative effect on schools.
He sees a system where special interest groups are granted tax breaks during a time when the state is flush with cash.
“It seems to me, if good times allowed us to give tax exemptions, then during bad times we should be allowed to take those exemptions back,” he said.
A help to nonprofits
The amount saved at Watkins Museum from not having to pay taxes isn’t much, a few thousand dollars at most, administrative assistant John Jewell said. But it adds up.
“It would be quite a crunch come budget time,” Jewell said of what would happen if the exemptions went away.
The sales tax exemption for the Girl Scouts allows the organization to keep around $375,000 more in profit from its cookie sales.
“It would be a huge impact,” said Gina Garvin, spokeswoman for Girl Scouts of Northeast Kansas and Northwest Missouri. “Really, to us it would mean cutting a program.”
As for the nonprofit that Wagnon calls a particular bone of contention — the Kansas City, Mo., humane society Wayside Waifs — the organization said that if the tax exemption wasn’t granted it would move its biggest fundraising event from Kansas to Missouri.
The nonprofit doesn’t have to pay taxes on food and rent for the annual Fur Ball at Overland Park Convention Center. It’s an exemption that costs the state around $10,000 each year, according to Department of Revenue numbers.
“For us to pay taxes on it would really cut into proceeds from the event and really limit what we do for the animals of the Kansas City area. And we serve both sides of the state line,” said Ashlee Parker, communication relations manager for Wayside Waifs.
A hard battle ahead
Any time changes are made to the tax code, there are winners and losers, said Richard Carlson, a Republican from St. Marys who chairs the house tax committee.
Carlson predicts a bill repealing tax exemptions surfacing at the next legislative session.
But he sees passing one as “very difficult.”
If there is a bill, Eckles, from the Kansas Chamber, expects to see a slew of lobbyists and groups camped out at the capitol.
“It is pretty ugly when you try to do this kind of stuff,” he said.
The chamber is open to having discussions about the tax structure, Eckles said. But he warned there would be a fight if the tax exemptions on raw materials and professional services, such as engineering, advertising and architecture, were threatened.
But Doll thinks once communities start seeing the aftermath the budget cuts have on education and social services, the political climate could change.
“We can’t make $3.3 million in cuts without hurting,” Doll said. “And the more it hurts, the more political willingness there will be to look at this.”