Longstanding debates over state income taxes — whether the rich should pay steeper rates, or whether fairness comes with a flat rate — could sink a plan Kansas lawmakers sent to the governor.
At stake is more than $300 million a year in tax relief to residents and the loss of that same amount to pay for state services.
Democrats and some economists argue setting the same income tax rate for nearly everybody lifts much of the burden off wealthier Kansans and threatens the state’s ability to pay for schools, prisons and other government services. They contend such a radical change to the state’s tax code poses a special risk when the possibility of a national recession looms so large.
All Kansans would pay a 5.15% state income tax, starting after the first $12,000 for married couples filing jointly. That’s projected to carve out more than $330 million a year from state revenues.
Republicans and conservative advocacy groups contend the single rate makes the tax code fair for all Kansans.
But Democratic Gov. Laura Kelly said before the Legislature passed the plan that she was skeptical of a flat tax. While lawmakers were negotiating the package in the Statehouse last week, Kelly told reporters that a single income tax rate would hurt the state’s revenue.
“I have looked at the numbers,” Kelly said, “and I have yet to come up with a flat tax that is sustainable over time.”
The package that ultimately landed on her desk comes with a much smaller price tag. The Senate’s initial proposal would have dropped the rate to 4.75% and cut revenue by $570 million a year. A similar plan was pitched by the Kansas Chamber of Commerce, one of the biggest conservative lobbying groups in the state.
But the House and Senate landed on a compromise rate. They paired that with a faster elimination of the state’s sales food tax next year and a reduction of Social Security taxes for people earning between $75,000 to $100,000 — two changes Kelly has championed.
That may not be enough to stave off Kelly’s veto, setting up yet another veto override fight in the Legislature at the end of the month. Republican lawmakers may have the votes to get it done.
In their votes to pass the bill, the House reached the veto-proof majority and the Senate came up three votes shy. But three Republican senators — Chase Blasi, Carolyn McGinn and Tim Shallenburger — were absent from the vote.
Donna Ginther, a University of Kansas economist, said enacting the flat tax portion of the bill could disrupt the state’s tax structure and lead to more diminishing returns than lawmakers are bargaining for.
The existing tax code has three brackets, ranging from 3.1% to 5.7%. That’s a classic progressive income where the richest Kansans pay a higher rate.
Switching to a flat tax would do the opposite and make the tax structure regressive, Ginther said. The lowest earners would pay the same rate, but a larger portion of their total income toward taxes than the highest earners.
“So shifting the burden,” Ginther said, “from people who have more than enough money to people who have less money.”
But Dave Trabert, CEO for the conservative Kansas Policy Institute, testified to a legislative committee that a single rate is the fairest way to tax income because everyone would be paying the same rate.
“This is not anyway going to make something unfair,” Trabert said, “if your definition of fair is ‘we all pay our share of the tax.’”
Republican lawmakers also contend a flat income tax rate could help the state’s economy. State Sen. Caryn Tyson said on the Senate floor that providing a tax cut will let Kansans spend more and juice the economy.
Tyson said income taxes would go down for all Kansans. Instead of paying taxes on the first $15,000 of income, or the first $30,000 for married couples filing jointly, no one would pay any taxes on their first $6,000 of income, or $12,000 for married couples. So even though people in the lowest current tax bracket would see their rate go from 3.1% to 5.15% percent, they'd still pay less in state income taxes.
“It’s time to give it back to the taxpayers,” Tyson said. “This considers everybody.”
But Ginther argues the current three-tiered tax code does a better job at stimulating growth.
Ginther argues that providing a lower tax rate for the lowest earners helps them buy items they already need but cannot afford. That puts more money into the state’s economy. Meanwhile, she said the richest Kansans could choose not to spend the money and save it or spend it on things outside of the local economy, like out-of-state vacations.
Ginther said that enacting the flat tax is also risky while the country teeters on the brink of a recession. If the nation’s economy slows down, the state will see its revenue decrease compounded. Businesses would likely lay off employees, cutting down the total taxable income in the state. Then spending would decrease as Kansans tighten their belts to get by, reducing state revenue from sales tax.
Ginther said that would lead to the state struggling to pay for the services that Kansans rely on during difficult economic times.
“It may,” Ginther said, “create fiscal challenges for the state moving forward.”
Dylan Lysen reports on politics for the Kansas News Service. You can follow him on Twitter @DylanLysen or email him at dlysen (at) kcur (dot) org.
Samantha Horton reports on health for the Kansas News Service. You can follow her on Twitter @SamHorton5.
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