In this second part of the halftime report for Tax Foundation Forum: Making Sense of Profit Shifting, we discuss the key takeaways from the first half of our series on profit shifting (read part I here). In this post, we...
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Kansas Governor Proposes Significant Income Tax Reform, Reducing Rate From 6.45% to 4.9%
In his State of the State address, Kansas Governor Sam Brownback (R) outlined a major income tax overhaul:
I'm proposing a major step in overhauling our state tax code to make it fairer, flatter, and simpler. My tax plan will lower individual income tax rates for all Kansans. It brings the highest tax rate down from 6.45 percent to 4.9 percent, the second lowest in the region - and lowers the bottom tax bracket to 3 percent. My plan also eliminates individual state income tax on most small business income.
As we modernize our tax code and lower everyone's rates, it is also time to level the playing field and simplify state taxes by eliminating income tax credits, deductions, and exemptions ─ while expanding assistance to low-income Kansans through programs that are more effective and accountable. I firmly believe these reforms will set the stage for strong economic growth in Kansas - and will put more money into the pockets of Kansas families and businesses. Growth that will allow us to further reduce tax rates and increase our competitiveness. Growth that will see people move to Kansas instead of leaving our state.
With that in mind, I ask the legislature to limit further growth in government expenditures to no more than 2 percent a year ─ and devote all additional revenues to reductions in state tax rates. This will get us ever closer to the pro-growth states with no state income taxes - which are among the country's strongest economic performers.
Kansas's current "top" income tax rate of 6.45% kicks in at $30,000 of annual income, so a lot of people pay it. Dropping it to 4.9% would definitely compare favorably to the top income tax rates of neighboring states: Nebraska (6.84%), Oklahoma (5.5%), Missouri (6%)—all except Colorado (4.63%).
The Kansas City Star learned more details: the plan is about revenue-neutral, it cancels a scheduled sales tax reduction of 0.6%, the standard deduction is doubled to $9,000 for head-of-household filers, state income taxes are removed from non-wage income like LLC income, and many separate deductions are eliminated: home mortgages, earned income, day care, adoption, historic preservation and environmental compliance.
Good tax reform means broadening the tax base while lowering the rate, as that removes distortions that harm economic growth. It sounds like Brownback's plan moves in this direction. The difficulty will be in convincing the recipients of those various special deductions to trade losing them for lower rates. On business tax climate, Kansas is currently middle of the pack, so Brownback's instincts and approach in his proposal are correct.
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