Kansas legislators are contemplating a number of tax coverage modifications this legislative session, and the Senate obtained the ball rolling on February twenty third by passing a sequence of payments that make senators’ tax coverage priorities clear.
A few of the proposed modifications, akin to changing to a flat particular person revenue tax construction and inflation-indexing the usual deduction, would promote financial development whereas making the tax code extra structurally sound. However different proposed modifications, like exempting retirement revenue and eradicating groceries from the native tax base, would cut revenue and gross sales tax bases, making the tax code much less impartial whereas doing little to develop the economic system.
Whereas the Home is predicted to think about its personal proposals, the Kansas Senate-passed payments function a place to begin for future negotiations between the 2 chambers. As these negotiations happen, policymakers ought to take into account the long-term results and trade-offs related to every of the modifications being thought of.
Changing to a Flat Tax Construction
One Kansas Senate-passed invoice, S.B. 169, would transfer Kansas from a graduated-rate to a single-rate particular person revenue tax construction starting in 2024, which might make Kansas the sixth state to enact laws changing to a flat particular person revenue tax construction previously two years alone. As a substitute of imposing a graduated-rate tax with a high charge of 5.7 p.c, Kansas would levy a extra aggressive, flat charge of 4.75 p.c on taxable revenue exceeding $5,225 for single people and $10,450 for married {couples} submitting collectively. This exclusion is along with the present customary deduction and private exemption and would be sure that all revenue taxpayers expertise tax aid although the brand new flat charge is larger than the present lowest charge of three.1 p.c.
Absent any modifications to the usual deduction or private exemption, single filers would pay roughly $76 much less in taxes on their first $35,750 in revenue than they pay below the present graduated-rate construction, and married {couples} submitting collectively would pay roughly $151 much less on their first $72,500 in revenue. And, with a flat charge of 4.75 p.c quite than a high marginal charge of 5.7 p.c, taxpayers would pay $9.50 much less in taxes on each $1,000 of revenue they earn over $35,750 (single filers) or $72,500 (joint filers) than they pay below present regulation.
The proposed single-rate construction can be extra conducive to job, wage, and general financial development in Kansas than the present graduated-rate construction, as lower-rate flat taxes keep away from penalizing further labor and funding on the margin. Lowering tax burdens on labor and funding on this method would permit all employees to maintain extra of their earnings whereas permitting pass-through companies to retain extra of their income to extend worker wages, rent extra employees, make new capital investments, and in any other case develop their companies.
One shortcoming of S.B. 169 in its present kind, nonetheless, is that the actual worth of the zero bracket would erode over time as a result of the revenue thresholds at which the flat tax charge kicks in should not yearly adjusted for inflation. If left unindexed, the share of a taxpayer’s actual revenue uncovered to taxation would enhance over time, as has already occurred for a few years as a result of lack of inflation indexing of Kansas’ customary deduction, private exemption, and revenue tax bracket thresholds.
Inflation-Indexing the Commonplace Deduction
A separate Kansas Senate-passed invoice, S.B. 33, would, amongst different modifications, index the usual deduction to inflation starting in tax 12 months 2023, a change now we have lengthy beneficial to forestall additional erosion of the actual worth of the usual deduction.
Policymakers also needs to take into account inflation indexing the $2,225 private exemption that’s obtainable for every Kansas resident taxpayer, partner, and qualifying dependent, as the actual worth of this exemption additionally continues to erode over time.
Exempting Retirement Earnings from Taxation
One other provision in S.B. 33 would considerably slender the revenue tax base in a nonneutral method by exempting from state taxation all revenue from federally taxable retirement plans and all Social Safety advantages.
Below present regulation, the Social Safety advantages of Kansans whose whole federal adjusted gross revenue (AGI) from Social Safety and different sources exceeds $75,000 pay taxes on all their Social Safety advantages, whereas these with $75,000 or much less in revenue pay none. This proposal would exempt at present taxable Social Safety advantages starting this 12 months and all of retirees’ retirement plan revenue as of 2024. This might make the tax code considerably much less impartial by offering preferential remedy to conventional over Roth retirement accounts. Particularly, for retirees with conventional IRA or 401(okay) plans, the state would now not tax that revenue when it’s distributed although such revenue can be untaxed when it’s earned and contributed to such accounts. In the meantime, Kansans who should not but retired and who contribute to Roth accounts wouldn’t obtain an analogous profit, since contributions to Roth accounts are taxed on the way in which in.
Relating to the proposed new exemption for all Social Safety advantages, ideally, Social Safety advantages must be handled as strange revenue for revenue tax functions. Social Safety, at its most elementary stage, is sort of a obligatory retirement plan that requires employees to put aside a portion of their earnings throughout their working years with the reassurance that they’ll have a fundamental supply of revenue in retirement. As such, Social Safety advantages must be taxed like revenue that’s accessed in retirement from a standard IRA or 401(okay) plan. As a substitute of eradicating Social Safety advantages from the revenue tax base altogether, Kansas ought to take into account fixing the $75,000 exemption threshold tax cliff, which now we have written and testified about beforehand, by changing it right into a extra gradual phaseout.
Whereas proponents of an exemption for Social Safety advantages have expressed a need to make Kansas’ tax code friendlier to retirees, giant revenue tax base carveouts put upward strain on the general charge that applies to all revenue, together with retirees’ revenue in addition to revenue earned by the employees and job creators who drive productiveness and financial development in Kansas probably the most.
Eradicating Groceries from the State and Native Gross sales Tax Base
A 3rd Kansas Senate-passed invoice, S.B. 248, would take away unprepared meals and meals substances from the state gross sales tax base one 12 months sooner than deliberate. It could additionally transcend present regulation to take away groceries from native gross sales tax bases as properly, which might end in substantial income loss to native governments.
Below present regulation (H.B. 2106, enacted in Might 2022), the state gross sales tax charge on unprepared meals and meals substances was diminished from 6.5 p.c (the overall state gross sales tax charge) in 2022 to 4 p.c in 2023, and the speed is scheduled to part right down to 2 p.c in 2024 earlier than going to zero in 2025. Nevertheless, below present regulation, native gross sales taxes would proceed to use to groceries.
Grocery purchases characterize a large and steady share of native gross sales tax bases, so with out this income, native governments are prone to flip to different income sources sooner or later—akin to property tax will increase or native gross sales tax charge will increase—to offset the income loss related to an exemption for groceries, making any web tax aid related to a grocery exemption prone to be short-lived.
Moreover, whereas many individuals assume eradicating groceries from state and native gross sales tax bases is a progressive coverage change, given present state and native gross sales tax exemptions for meals bought with SNAP and WIC advantages, our analysis exhibits lower-income taxpayers are sometimes higher off with groceries included in gross sales tax bases at decrease across-the-board charges than they’d be with groceries exempted however with the present basic gross sales tax charge making use of to all different taxable purchases.
Additionally it is value noting that whereas Kansas’ continued standing as a Streamlined Full Member State—a state that adheres to Streamlined Gross sales and Use Tax Settlement (SSUTA) insurance policies—is contingent upon sustaining a lot uniformity between state and native gross sales tax bases, the gross sales tax remedy of meals is one space during which member states are allowed to use the gross sales tax to groceries on the native stage with out doing the identical on the state stage.
Lastly, in comparison with revenue tax charge reductions—which enhance returns to labor and funding—gross sales tax exemptions do little to advertise long-term financial development.
Conclusion
As Kansas legislators take into account further tax coverage modifications this legislative session, they need to prioritize financial development and a structurally sound tax code. Whereas base-narrowing provisions could also be politically fashionable amongst those that would obtain an exemption, narrowing tax bases places upward strain on tax charges over time, which might negate the revenue-negative impression of most of the exemptions at present being proposed.