February 28, 2007

A Golden Opportunity for Tax Reform

(This commentary appeared in the (Kansas City) Kansan on February 28, 2007.)

A consensus is forming among Kansas lawmakers to do something about the state’s business tax system. Governor Kathleen Sebelius took the lead this year by proposing reductions in the corporate income and franchise taxes and the House followed suit by repealing the franchise tax last week.

Whether the Senate is going to follow the House’s lead on the franchise tax is still unclear. But a closer look at the Kansas tax system reveals that eliminating the franchise tax is the best short-term way to improve the competitiveness of the Kansas tax system and enhance economic growth.

In 2006, the tax burden paid by Kansas residents ranked 18th highest in the nation with taxes eating up almost 11 percent of income. Every state surrounding Kansas has a lower tax burden except Nebraska, where the tax burden will certainly go down if Governor Dave Heineman’s proposal to reduce individual income tax rates becomes law.

Eliminating the franchise tax will efficiently reduce Kansas’ tax burden since it stands out as one of the most uncompetitive taxes the state levies-worse even than the sales tax, the property tax, or the individual income tax. Kansas’ franchise tax rate is higher than any of its neighbors save Oklahoma, which levies the same rate. Missouri and Oklahoma, however, are currently debating bills to eliminate or reduce their franchise taxes.

Thus, a mere reduction in the franchise tax rate-as opposed to repeal-will not substantially enhance the competitiveness of the Kansas business tax climate. If Missouri and Oklahoma both take action on franchise taxes this year, Kansas will likely still have the highest rate even if lawmakers lower the tax.

Can Kansas afford to eliminate the franchise tax? The fact that the tax brings in less than $50 million per year says it can.

Anytime a state can eliminate a tax that raises less than half of one percent of total revenues, as Kansas’ franchise tax does, lawmakers should jump at the opportunity. Eliminating a tax not only lowers the burden but also simplifies the tax system. That alone easily makes franchise tax repeal worth the $50 million price tag.

Of course, some will bemoan any reductions or eliminations in business taxes because they see them as giveaways to the wealthy. But these often well-intentioned souls neglect a simple economic fact: businesses don’t pay taxes, people do. Taxes on businesses get passed to individuals through higher prices for consumers or lower wages for employees.

Businesses cannot “pay” corporate taxes anymore than a plot of land can pay property taxes. Real people-not inanimate business entities-pay the true burden of business taxes, which means that franchise tax repeal would ultimately be a tax cut for the people of Kansas.

While bipartisan agreement on the need for business tax reform in Kansas is a blessing, that agreement needs to produce something that will tangibly improve the lives of Kansans. Given Kansas’ high tax status in the region, lawmakers need to be bold. Eliminating a tax-something state lawmakers rarely do-is exactly the kind of boldness that is needed.

Jonathan Williams is Staff Economist and Chris Atkins is Staff Attorney at the Tax Foundation, a nonpartisan tax research organization located in Washington, D.C. Jonathan is also a Tax Policy Fellow at the Flint Hills Center for Public Policy.