Kansas Governor Signs Encouraging Tax Reform

June 19, 2013

Plan Modifies Previous Year’s Tax Reduction Package

Washington, D.C., June 19, 2013—Kansas Governor Sam Brownback has signed a new tax reform bill, addressing some drawbacks of last year’s legislative efforts and resulting in an improved tax code for the state, according to a new analysis by the nonpartisan Tax Foundation.  Last year’s reform plans ultimately fell short of expectations due to flawed exemptions for so-called “pass-through” businesses as well as a lack of base-broadening which created an approximate $800 million revenue gap.

Although the bill is actually revenue-positive, the combined effect of both bills remains a net tax cut. After incorporating the 2012 and 2013 changes, as well as changes in state spending, the state now faces a budget gap of between $95 million and $182 million per year, a significant reduction from last year. This year’s bill includes:

  • Lowering income tax rates even further, ultimately to 2.3 percent on the first $30,000 of income and 3.9 percent on income above that.
  • Sets the sales tax rate at 6.15 percent beginning in July 2013. At first glance, this seems like a tax cut, as the sales tax was 6.3 percent. However, the tax had been scheduled to drop to 5.7 percent in July 2013.
  • Reduces the value of itemized deductions by 30 percent this year and by 5 percent per year until 2017 when they will be reduced 50 percent permanently. The charitable deduction is an exception to this treatment and will remain fully deductible.
  • Decreases the standard deduction for married filers filing jointly ($7,500) and heads of household ($5,500), down from $9,000. The amounts are still higher than pre-2012 law ($6,000 and $4,500, respectively).
  • Restores the low-income food tax credit.
  • Ends the itemized deduction for gambling losses.

This move toward a lower tax burden is supported as good policy by a wide body of empirical literature. In a recent review of 26 peer-reviewed studies that have been written on the topic, the Tax Foundation revealed that 23 of those studies found that increasing taxes hurts economic growth. According to Tax Foundation Vice President of Legal & State Projects Joseph Henchman, “the Kansas reforms over the last two years will result in hundreds of millions of dollars in tax cuts, and returning that money to the private sector will produce long-term growth gains.”

Additionally, the study also revealed that, among various types of taxes, corporate and individual income taxes are the most harmful to growth, while sales and property taxes are less harmful. The net effect of Kansas’ last two tax reform efforts is a lower individual income tax rate that is paid for largely by broadening bases. While the sales tax rate is also reduced, Kansas’ tax code is now based more on consumption, a move that will contribute to greater economic growth.

“While legislation ultimately passed in Kansas has been a mixed bag over the past two years, and the end result is still a code that has a large carve out for pass-through income, the positive elements outweigh the negative elements,” says Tax Foundation Economist Scott Drenkard.

Tax Foundation Fiscal Fact No. 374, “Kansas 2013 Tax Reform Improves on Last Year’s Efforts” by Joseph Henchman and Scott Drenkard, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Borean, the Tax Foundation’s Communications Associate, at 202-464-5120 or borean@taxfoundation.org.

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