Topeka — As Gov. Sam Brownback prods fellow Republicans to cut the state income tax, a study released Thursday says reducing that levy will probably lead to higher property and sales taxes and undermine funding for schools, roads and public safety.
“If Kansas gets rid of the income tax, the state will likely find itself both raising other taxes on middle- and low-income families and making massive cuts to vital services that will badly damage the state’s economy,” said Erica Williams, policy analyst and co-author of the report done by the nonpartisan Center on Budget and Policy Priorities.
The center’s report, released a day after much of Brownback’s tax plan advanced to a House-Senate conference committee, showed that states without an income tax have either sales or property taxes or both that are higher than states that levy an income tax.
For example, Kansas ranks 20th highest in percent of personal income spent on property taxes, and 17th in sales tax, the study said. Additionally, Kansas’ sales tax ranking will fall lower if the rate is allowed to decrease next year, as current law states.
Texas, which doesn’t have an income tax, ranks 14th highest in property tax and 13th in sales tax, the study said. Wyoming, another state without income tax, ranks fourth highest in property tax and No. 1 in sales tax. And South Dakota, which doesn’t have a state income tax, ranks 32nd in property taxes, and seventh in sales taxes.
Brownback and other supporters of cutting the state income tax, however, have argued that the plan will increase jobs and lure more businesses to Kansas. They say that growth-oriented tax reform requires shifting taxes from income to consumption.
A key component of Brownback’s plan eliminates income tax on non-wage business income and could affect 191,000 filers. The Brownback administration has called this a “unique and highly targeted strategy to make Kansas an incubator for innovation and a national center for entrepreneurship.”
But the center says this proposal would provide a tax break on what is called “pass-through” profits, which would benefit many large corporations and wealthy owners of large investment funds that have no employees. These large corporations are organized as partnerships, Subchapter S corporations and limited liability companies, the center said.
IRS data show the profits from pass-through entities and sole proprietorships represent about 8 percent of the Kansas personal income tax base, or $266 million. A $266 million loss of tax revenue is greater than the combined state appropriations for Kansas University and the KU Medical Center.
Legislative Democratic leaders say the hit could even be greater because businesses will reclassify their income to avoid taxes.
On Thursday, the Democrats bemoaned the fact that the Senate on Wednesday approved a massive tax-cutting bill after first voting it down.
“This bill would send our state to hell in a hand basket,” said Senate Minority Leader Anthony Hensley, D-Topeka.
All eight Democrats and 12 of the Senate’s 32 Republicans initially defeated the bill on a 20-20 vote. But after Brownback’s office spoke with several Republicans, they moved to reconsider the vote and nine Republicans flipped to pass the bill.
The measure would reduce income tax rates, maintain numerous deductions and credits and keep in place the schedule decrease in the state sales tax from 6.3 cents per dollar to 5.7 cents per dollar next year. It would reduce tax revenue to the state by $3.7 billion over five years.
Such a tax cut would make it impossible to increase school funding, which has been cut over the past several years, Democrats said.
The House has passed a tax-cutting bill that contains some of the same provisions as the Senate bill. A House-Senate conference committee starts meeting Monday to work on differences between the proposals.