There had been discussion this budget cycle to cut enough spending out of the budget to allow the sales tax to lapse back to 5.7% from 6.3% on July 1, 2013. Neither Chamber could get close to that deep of a cut. We ended up with about a $115 million cut over the governors recommended cut and other budget adjustments. This set the stage for keeping some of the 6/10th sales tax scheduled to lapse. A certain percentage of the 6/10th sales tax will be needed to fund essential government services and stabilize the budget going forward. Taxes in 2013 were cut significantly totally over $800 million. $600 million in personal income tax cuts and another $200 million in non-wage income pass-through no longer taxed in LLC's, Sub Chapter S corporations, and other similar tax styled partnerships.
Shift From Taxing Productivity To Taxing Consumption
We started the transformational tax policy last year with the sharp drop in personal income taxes and removing tax on non-wage income in LLC's, Sub Chapter S corporations, and other similar tax styled partnerships. Kansas has a 24% personal income tax reduction effective January 1, 2013. This will result in $800 million income tax decrease over the next 12 months. A certain percentage of the 6/10th sales tax scheduled to lapse on June 30, 2013 will be needed to "pay for" the income tax cuts as we transform to consumption tax.
The House and Senate finally started voting on different tax proposals last week. The only way to reach a compromise and bring the session to a close is to start having floor votes on different tax plans. The Senate sent its tax plan over to the House last Friday. The plan called for keeping the sales tax rate at 6.3% and lowering the tax on groceries to 4.95%. The House soundly rejected the Senate plan with a vote of 5 Yes, and 109 No. By the end of Friday, the Tax Conference Committee agreed to accept the House tax plan and have the House vote first. The House could vote on this plan as early as Tuesday or Wednesday? The headwind we see with this House plan is it has a sharp income tax cut in 2017. The top income tax rate decreases to 3.7% in 2017 from 4.8% in 2016. The sharp decrease will deplete the ending balance in the State checking account in 2018 and go negative in 2019. Although 5 years is a long ways to project out, the sharp income tax cut of 1.1% will have to be dealt with. A 1.1% income tax rate reduction on the top rate would result in at least a $500 million tax cut in 2017-18. It sets up another scenario similar to the one we created in 2013 in that it has no "pay fors." Both the House and Senate plans phase out most deductions tied to lower income tax rates attempting to get to a flat tax scenario.
Both House and Senate plans get Kansas income tax rates low and competitive with surrounding states. The proposed rates as they now stand are in the table below:
Tax brackets from surrounding states.
Oklahoma and Missouri are working on tax policies to lower their top rates to around 4.8%. Kansas will be competitive immediately if the competing states do accomplish their goals. In addition, with the proposed further reductions Kansas will be the most competitive state in our region on income taxes.
8416 W. 115th Street
Overland Park, KS 66210
Paid for by "Jim Denning for Kansas Senate"
Kathy Vance, Treasurer