Kansans May Finally Get a Low, Flat Income Tax

After two years of unsuccessful attempts to move to a single-rate individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. structure, Kansas legislators recently sent the governor a proposal that would phase in numerous pro-growth taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy changes over time, including a flat income tax.

Senate Bill 269 passed the House and Senate at the end of March with more than two-thirds of legislators supporting the measure in both chambers. This legislation would use tax triggers to dedicate individual income tax, corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , and privilege tax revenues over an inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. -adjusted fiscal year (FY) 2024 baseline to implement income tax reform and relief, provided the state’s Budget Stabilization Fund remains well-funded. If adopted, these reforms would make Kansas’ tax code substantially more competitive while returning revenue growth to taxpayers in a fiscally responsible manner.

Specifically, beginning in August 2025, SB 269 would require the Director of the Budget to determine whether income (individual and corporate) and privilege tax revenues from the preceding fiscal year (starting with FY 2025) exceed inflation-adjusted FY 2024 income and privilege tax collections amounts. In years in which real collections growth does occur, and the Budget Stabilization Fund balance is at least 15 percent of the prior year’s State General Fund tax revenues, the Secretary of Revenue would be required to calculate the appropriate rate reductions, to the nearest one-hundredth of a percentage point, that would provide a corresponding amount of tax relief.

Under this proposal, the state’s individual income tax rates would be reduced first. Currently, Kansas has a two-bracket individual income tax, with a rate of 5.2 percent on an individual’s first $23,000 of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. ($46,000 for married couples filing jointly), and a rate of 5.58 percent on taxable income exceeding $23,000 (single)/$46,000 (joint). Excess revenues would first be used to proportionally reduce both rates until a single rate of 4 percent applies to all taxable income. This proposal would therefore lower taxes for income taxpayers of all income levels, including owners of pass-through businesses that pay taxes under the individual income tax code.

Importantly, reductions to top marginal individual income tax rates have been shown to have a positive effect on wages, hours worked, employment levels, and gross state product growth, and flatter tax structures better promote upward mobility and real wage growth. As such, phasing in a relatively low, flat income tax rate would yield economic benefits for the state.

Once the individual income tax rate reduction to 4 percent is fully phased in, reductions to the corporate income tax surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. and the privilege tax’s “normal tax” rate would occur in corresponding amounts until the combined corporate income tax rate reaches 4 percent, the combined rate for banks reaches 2.6 percent, and the combined rate for trust companies and savings and loan associations reaches 2.62 percent.

Currently, Kansas has a two-bracket corporate income tax structure, with a “normal tax” rate of 3.5 percent and a “surtax” of 3 percent, which brings the combined rate to 6.5 percent on corporations with more than $50,000 in net income. Under this proposal, the surtax would be reduced until the combined rate of the normal tax and surtax reaches 4 percent. Of the major sources of state tax revenue, corporate income taxes have been shown to be the most economically harmful, so reducing Kansas’ corporate income tax rate would promote stronger economic growth in Kansas while yielding benefits to consumers in the form of lower prices, employees in the form of higher wages, and shareholders in the form of higher returns on investment.

Finally, since financial institutions pay privilege taxes instead of corporate or individual income taxes, the proposal to reduce privilege tax rates would ensure financial institutions are not excluded from the benefit of the proposed rate reductions that apply to other businesses.

If these reforms had been fully phased in as of July 1, 2024, the snapshot date for the 2025 State Tax Competitiveness Index, Kansas would have ranked 17^th overall, 10^th on the individual tax component, and 11^th on the corporate tax component, substantial improvements from its current ranks of 25^th, 27^th, and 27^th, respectively.

Since 2021, the state income tax landscape has grown exceptionally competitive, with 28 states reducing individual income tax rates, 15 states reducing corporate income tax rates, and 6 states moving from graduated-rate to single-rate individual income tax structures, a move that has proven beneficial for numerous states seeking to reverse outmigration trends and attract and retain businesses and individuals.

The reforms proposed in SB 269 are consistent with recommendations in our 2019 Kansas tax reform options guide to reduce individual and corporate income tax rates and move to a single-rate income tax structure. Phasing in these reforms as revenue becomes available, and making these reforms contingent upon a continually well-funded Budget Stabilization Fund, is a prudent approach to ensure rate reductions phase in responsibly. Ultimately, these reforms would be a significant step in the right direction for Kansas, helping the Sunflower State gain a notable competitive advantage in a highly competitive state tax landscape.

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