Governor’s tax council warns against proposals by Republicans to diminish Kansas revenue

The Governor's Council on Tax Reform heard updates Friday on proposed tax policy changes in Kansas and how they could impact the state's fiscal reality. (Screenshot of Governor Laura Kelly YouTube by Kansas Reflector)

TOPEKA — The Governor’s Council on Tax Reform is advising extreme caution on any tax policies that may diminish revenue until Kansas has restored fiscal damage imposed by the pandemic.

Presenting before the council Friday, Mark Burghart, secretary of the Kansas Department of Revenue, said it would be best to tread carefully until state fiscal health is restored. This would include the creation of a rainy day fund and an end to the transfer of highway dollars.

Proposed changes to tax law by the Republicans in the state Legislature, however, are not in line with that thinking. Several bills heard so far would cost the state hundreds of millions of dollars in annual revenue.

“Given the devastation to the public sector brought about by the ill-conceived tax policy in 2012, the council recommends that the governor and the Legislature exercise extreme caution when considering proposals that would diminish revenue,” Burghart said, reading from the 2020 council report. “The damage to the state has been great and the return to financial normalcy will take time.”

Council members heard reports from economic and tax analysts on how proposed legislation in the Senate and House could impact Gov. Laura Kelly’s proposed budget. They also considered tax policies that would fit the governor’s goal of returning to the “three-legged stool” approach which relies on a balance of income, sales and property tax.

The first bill discussed has several amendments to the current tax policy, some of which the Republican-controlled Legislature has worked to pass previously. 

The most significant change would allow Kansans to itemize deductions on their state tax filings even if they do not do so on their federal tax return. This move would cost the state $244.8 million and benefit less than 7% of Kansas taxpayers, according to an analysis by the Institute for Policy and Research at the University of Kansas.

Some aspects of the bill, in a process known as decoupling, would also move state tax code away from federal code. For example, the bill would provide flexibility for businesses to bring profits from overseas back into the state without paying taxes on them.

KU analysis indicated this would mostly benefit large, multistate or multinational corporations and cost about $71.4 million.

The measure also provides exemptions from state taxes on Paycheck Protection Program loans if the individual is paying federal taxes on the funds. The bill is currently in the Senate Committee on Assessment and Taxation.

A second bill would provide a refundable tax credit for certain food purchases and discontinues the nonrefundable food sales tax credit. Prior to then-Gov. Sam Brownback’s 2012 tax policy overhaul, a refundable food credit was part of state law.

The credit would cost $166.66 million, although it would also decrease inequity in state tax policy by providing for low-income families.

Richard Auxier, senior policy associate for the Tax Policy Center of the Brookings Institution Urban Institute, said tax code may be complicated, but the decision facing Kansas policymakers is a simple one.

“Do these proposed changes fit Kansas’ budget and its values?” Auxier said. “In general, these tax changes would cost the state tens if not hundreds of millions of dollars, and the changes would mostly benefit large corporations. Is that how Kansas wants to spend its limited resources?”

In a letter sent this week to the Legislature and the governor, a group of 40 economists, public affairs experts and administrators urged policymakers to avoid budget cuts and instead increase taxes. They warned cuts would have “profound negative consequences.”

“Kansas spends most of its budget on health, education, public safety, public transportation and safety net programs,” they wrote. “Large cuts in these critical areas would erode the health and infrastructure needed to continue combating COVID-19, increase an already high level of inequality and exacerbate the economic downturn.”

Emily Fetsch, director of fiscal policy for Kansas Action for Children likened the GOP-favored tax bills to changes made in 2012.

“Kansas can decide to help children and families and strengthen our state,” Fetsch said, “or we can decide to pursue the failed policies that led to a lost decade for our state.”

Two tax policy changes — applying sales tax to digital goods, such as streaming video services and music downloads, as well as third-party online retailers — within the governor’s proposed budget would add $257.4 in revenue by closing tax code loopholes.