Testimony to: Kansas’ Senate Committee on Assessment and Taxation; and Kansas’ House Committee on Taxation Presenting: Kansas Tax Modernization: A Framework for Stable, Fair, Pro-growth Reform

1. January 28, 2020
KANSAS TAX MODERNIZATION
A Framework for Stable, Fair, Pro-growth Reform
Michael Lucci
Erica York
Katherine Loughead

2. Outline
• Reform Guide Introduction
• Corporate Income Taxes
• Individual Income Taxes
• State and Local Sales Taxes
• Property Taxes

3. Reform Guide Approach
• Background research and prep
• Interviews across industry and geography
• Analysis and writing
• Continual engagement with stakeholders and
policymakers

5. Narrative/Recommended Priorities
• Unlegislated tax increases
• Corporate tax reform
• Long-term competitiveness

6. Corporate Income Taxes

7. Kansas Corporate Income Tax
• Two-rate corporate income tax
• 4 percent rate
• 3 percent surtax
• Raises $23 million to $87 million per percentage point
• FY 2019 = $62.8 million per percentage point

8. Structural Elements and Solutions
• Unlegislated tax increase
• Remove International Income from the Tax Base
• Federal reform created Global Intangible Low Tax Income
• Kansas corporations could face significant tax for the activities of
their foreign subsidiaries or related corporations
• Taxing GILTI would make Kansas far less attractive to
multinational corporations

9. Structural Elements and Solutions
• Improve Net Operating Losses
• Currently disallows carrybacks and offers 10-year
carryforward
• Transition to 20-year carryforward or conform
• Lock in Full Expensing of Capital Investment
• Kansas conforms to full expensing of machinery and
equipment
• Federal treatment scheduled to expire

10. Structural Elements and Solutions
• Shift to Market Sourcing of Service Income
• Three factor apportionment
• Consistency is important
• Sales factor apportionment should follow one set of rules
• Repeal the Throwback Rule
• Punishes businesses that sell out of state
• Counterproductive

11. Long-Run Priorities
• Incentive Review
• 8 of 38 credits and deductions had reportable utilization
• Rate Reform
• 21st highest among 44 CIT states

12. Individual Income Taxes

13. Avoid Increasing the Top Marginal Rate
• Kansas’ median household income is
$56,400, so many Kansans have income
exposed to the top marginal rate.
• Because income taxes discourage wealth
creation, they are among the more
economically harmful tax types.

14. Index Income Tax Provisions for Inflation
• Currently, Kansas offers a standard
deduction of $3,000 (single filers) and a
personal exemption of $2,250 per
person. These amounts have remained
stagnant since 1988 and 1998,
respectively.
• If adjusted for inflation, the standard
deduction would be at least $6,500, and
the personal exemption would be at least
$3,550 in today’s dollars.

15. Allow an Independent Choice of Itemization and
Increase the Standard Deduction
• Kansas taxpayers who claim the federal standard deduction must also claim the state standard
deduction.
• Among the approximately 20 percent of filers who switched from itemizing to claiming the
standard deduction after the TCJA took effect, most of those taxpayers now face a lower
federal individual income tax burden – but a higher Kansas individual income tax burden – than
they did previously.
• This unlegislated state income tax increase can be remedied by increasing the Kansas standard
deduction or by allowing taxpayers to itemize on their state return even if they claim the
standard deduction on their federal return.

16. Other Reform Considerations
• Remedy the marriage
bonus and penalty in the
standard deduction and
additional standard
deduction.
• Roll back excessive credits.
• Mitigate the Social Security
tax cliff.

17. State and Local Sales Taxes

18. Kansas’ Sales Tax Rate is High Regionally and Nationally

19. Remove Barriers to Interstate Commerce
Features of South Dakota’s remote sales tax law highlighted in the Wayfair
decision that “appear designed to prevent… undue burdens upon interstate
commerce”:
1. Safe harbor for small sellers
2. No retroactive collection
3. Single state-level administration
4. Uniform definitions of products and services
5. Simplified tax rate structure
6. Software
7. Immunity

20. Broaden the Sales Tax Base
• Broadening the sales tax
base to additional goods
and services, while
excluding business
inputs, would help
prevent further erosion
of Kansas’ sales tax base.

21. Exclude Business Inputs from Taxation
• The sales tax should not apply to business inputs (goods and services
purchased by businesses in the course of doing business), as this
results in tax pyramiding.
• To avoid taxing business inputs, policymakers ought to consider
creating sales tax exemption certificates for widespread use by
businesses and nonprofits.

22. Other Reform Considerations
• Instead of reducing the sales tax rate on food, consider making
the “Food Sales Tax Credit” more generous.
• Modernize the STAR Bond program.

23. Property and Related Taxes

24. Structural Elements and Solutions
• Property Tax Lid
• Restructure in mold of Truth in Taxation (TNT) Requirements
• The current property tax lid has significant exemptions
• Create a broader TNT lid applying to more governments and more expenditures
• Consolidation
• Consider ways to achieve local government consolidation
• Data shows that Kansas has more local government headcount than its peers
• Study ways to incentivize consolidation for efficiency and tax relief

25. Structural Elements and Solutions
• Tangible Personal Property Taxes
• Reduce reliance on taxpayer-active TPP
• Circumscribe taxation to real property
• Raise de minimis threshold, exempt new purchases
• Intangible Property Taxes
• Preempt local taxation of earnings from intangible property
• Highly anachronistic, complex, non-neutral tax that distorts wealth allocation
• One-third of counties and townships, one-fifth of cities levy
• Assess local dependence on these revenues and then gradually phase out

26. Structural Elements and Solutions
• Dark Store Theory
• Direct Appraisers on assessment methodology for retail properties
• Court rulings invalidate appraisals based on lease-in-place or income potential
• Director of Division of Property Valuation should provide guidance for appraisers in line
with Kansas Board of Tax Appeals and Kansas Supreme Court decisions
• Partial Payment of Tax Under Appeal
• Revisit partial payment of tax under appeal
• Partial payment can create instability and incentivize overassessment
• Reduce partial payments or have tax dollars held in escrow

27. Other Tax and Revenue Considerations

28. Other Tax and Revenue Considerations
• Rainy Day Fund
• Shore up the rainy day fund
• Budget Stabilization Fund created in 2016
• Create parameters for mandatory deposits
and for withdrawals
• Border War
• Maintain the “Border War” truce
• Adhere to tax-poaching ceasefire
• Incentivize localities to not defect

29. Questions?
Michael Lucci
V.P. of State Projects
mlucci@taxfoundation.org
Katherine Loughead
Senior Policy Analyst
kloughead@taxfoundation.org
Erica York
Economist
eyork@taxfoundation.org