Gov. Sam Brownback and the Kansas Legislature are in a bind. The official revenue estimate for fiscal 2014 is more than $600 million short of the governor’s recommended budget for the year. He must be desperate to find more revenue to keep his promise of maintaining adequate education and other essential services for the state.
As a partial fix, the governor proposes that Kansas hold the state sales tax at 6.3 percent instead of allowing it to fall to 5.7 percent, as was promised to us at the time of the emergency increase in 2010.
Even if the sales tax is not reduced, the revenue shortfall will be about $400 million — which still means some drastic service cuts. But let’s focus for now on a critique of the sales tax.
Brownback has said he wants Kansas taxes to be lower than those of other states. He certainly ignores that guideline when it comes to the sales tax. Kansas, even at 5.7 percent, has a higher sales tax rate than any of the four surrounding states.
Moreover, in terms of equity for low-income individuals, the Kansas sales tax is out of line compared to its neighbors. Nebraska and Colorado have no tax on food or prescription drugs, and Missouri limits the sales tax on groceries and prescriptions to 1.225 percent, while Brownback wants low-income Kansans to pay 6.3 percent on food purchases, which consume a large share of their modest incomes. Until legislation in 2012 removed it for 2013 and following years, low-income families (restricted to those with children or over age 55) could get a special food tax rebate attached to the Kansas income tax.
If the governor and Leg-islature insist on increasing revenues from the sales tax despite the burden compared to neighboring states, why not modify the sales tax structure in some way other than a rate increase?
We see and hear a lot of talk about broadening the base of income subject to the income tax so that rates can fall while revenue stays the same. In a similar fashion, Kansas could broaden the sales tax base to include some services (services are haircuts, architect and veterinarian services, etc. — that is, everything that is not tangible “stuff” such as clothing, food, electronics).
Currently untaxed services make up approximately 65 percent of personal consump-tion. The percent of family income spent on services increases as one moves up the income ladder. If we add some service items to the sales tax base, we could hold revenue constant while lowering the sales tax rate, and also add greater equity across income levels (the burden of the sales tax at present falls most heavily on low-income families).
Not only could Kansas lower the sales tax rate by taxing services, but it could likely exempt food and prescriptions, partially or wholly, from the tax.
The taxation of services will bring objections from the service industries. Kansas would have to be clever and throw a very wide net over many services. The rate could be even lower for services than for tangible products. This proposal cannot be achieved during the remainder of the 2013 legislative session. Let’s start work on it now and be prepared for 2014.
In the meanwhile, for fiscal 2014, the only way to keep the state solvent (by law it must have a balanced budget) and avoid drastic cuts to education and other services is to undo some of the reductions in the income tax. The Legislature could add a temporary surtax to the income tax to maintain revenues until it can broaden the base for the sales tax.
For readers with an interest in the income tax and the governor’s attempt to encourage business, see the discussion of Brownback’s tax package in an article by Don Lefler in the Wichita Eagle of April 14, titled “Analysts, from left and right, call Kansas tax plan worst in nation.”
Ed Olson, a Manhattan resident, is an emeritus faculty member of the economics department at KSU, where he taught public finance for 30 years and served as K-State’s representative to the state’s consensus revenue estimating committee for 12 years.