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The problem with sales taxes

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The Kansas Legislature's top tax analyst tried to explain something to lawmakers Thursday that many people are still trying to get their heads around: Why, at a time when there is modest but measurable inflation in the retail sector, is Kansas not seeing similar growth in retail sales tax collections?

That was one of the puzzles buried inside the new revenue estimates that were released last week. Despite the fact that the U.S. inflation rate is expected to hover around the 2 percent range for the next couple of years, retail sales tax collections in Kansas are forecast to grow less than 1 percent each year.

Chris Courtwright, the longtime principal economist in the Legislature's nonpartisan Research Department, told a joint meeting of the House and Senate budget committees Thursday that essentially flat growth in sales tax collections may be "the new normal," at least for the foreseeable future.

Courtwright said that's because the basket of goods and services that make up the Consumer Price Index — the basic measure of inflation — is made up of all kinds of things consumers buy, some of which are going up in price and some of which aren't.

The problem for Kansas, he said, is that the category of things that are rising in price are things Kansas doesn't tax: rent, health care and college tuition, to name just a few. The things Kansas does tax, such as food, clothing, computers and microwave ovens, are generally going down in price.

This wasn't the first time that the Consensus Revenue Estimating Group has noted the trend in its semi-annual revenue forecasts. That group, which includes university economists, the Research Department, the governor's budget office and the Department of Revenue, also noted it in their report in November when they slashed the current-year revenue forecast by $346 million, or 5.5 percent. One third of that reduction, or $115 million, was due to lowered expectations of sales tax collections.

The problem also is not unique to Kansas. People here buy from and sell to the same commercial economy as everyone else. But it does raise some interesting questions for lawmakers when they return next week for the final phase of the 2017 session, much of which will be focused on coming up with a tax plan to close a revenue shortfall estimated at more than $800 million over the next two years.

For decades since Kansas first enacted a sales tax in the 1930s, the state could count on natural growth in that revenue stream of 3-5 percent each year on average. That appears no longer to be the case. And adding to the stress is the fact that those items that are rising in cost — particularly health care and education — are the very things that state government buys a lot of.

One solution that frequently comes up when discussing sales taxes would be to expand the sales tax base to capture those items that are currently exempt, primarily services. But one of the biggest categories of "services" in Kansas is health care services, and one can only imagine the outrage from constituents that would erupt when they start seeing a sales tax charge tacked on to their doctor bills.

Another option on the table may sound counter-intuitive at first. That would be to lower the sales tax rate, particularly on food, which some people argue is so high now that it's actually driving consumers in border counties to shop in Missouri or Nebraska, where sales taxes are lower. But there is little concrete data to show how much of that is actually happening, or how much revenue, if any, Kansas could recapture by pegging its sales tax rate to those of neighboring states.

There is also little Kansas can do on its own to capture more online retail business with its sales tax. It would take an act of Congress to establish a uniform national policy on taxing online sales, and neither the Trump administration nor the Republican-controlled Congress is currently in a mood to pass anything that even smells like a tax increase. In fact, quite the opposite.

That means when lawmakers return next week, they will probably have to look elsewhere to find a fix for the state's current budget shortfall.

Comments

Carol Bowen 3 weeks, 3 days ago

Historically 3-5 %, now less than 1 % sales tax revenue stream could be an indication of the Kansas economy in a downward spiral. Kansans have zipped up their wallets. Fewer microwaves, less food and clothing, using old computers.

What states have sales tax on rent, college tuition and healthcare?

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