February 21, 2007

Tax Reform Can Boost Kansas’ Tax Climate

(The following article originally appeared in the February 21, 2007 edition of the Wichita Eagle.)

In the battle for business investment, Kansas ranks a lukewarm mediocre. All of the states that border Kansas, save Nebraska, have more competitive business tax climates. This is causing the state to lose ground by standing still.

The good news is that the Kansas Legislature is doing something about it. The bad news is that it may not go far enough to make a real impact.

The House took the bold step of repealing Kansas’ franchise tax, an excellent target for repeal because many other states have no franchise tax. This extra burden has long put Kansas businesses at a competitive disadvantage.

Now it is the Senate’s turn to step up. State senators must resist the urge to simply reduce the franchise tax. Repeal has the double advantage of lowering business tax payments and eliminating the administrative burden of complying with the tax.

Kansas would be well-advised to go even further: Repeal the franchise tax and cut the corporate tax rate. In a new Tax Foundation report, we have recommended the Legislature reduce the top corporate tax rate to 6.25 percent, tying it with Missouri, and set a long-term benchmark of lowering the rate to 4 percent.

The most competitive states in the country — as scored by the Tax Foundation’s annual State Business Tax Climate Index — all show much faster rates of growth than those that are the least competitive. Kansas falls in the middle nationwide but among the bottom compared with its neighbors. Repealing the franchise tax and reducing the corporate rate would boost the Kansas score on this gauge of business climate and increase the likelihood of economic growth.

Further, these changes would force Kansas’ neighbors to do the same or risk standing by while Kansas is flooded with new business investment. (Missouri and Oklahoma already have franchise tax repeals on the table.) The resulting competition could be a major boost for the entire region.

Will Kansas lawmakers step up to the challenge? They have to.

In today’s global economy, capital and labor are more mobile than ever. Kansas doesn’t just compete with Colorado, but also Canada; not just Missouri, but Mexico as well.

While a state’s tax structure is not the only consideration for a business making investment decisions, it is the only thing state lawmakers can change quickly that will have immediate rewards.

Investing in education and infrastructure are worthy goals, but the benefits may not be seen for a decade or more. And even if they are successful, states with punitive tax systems that hinder growth and job creation will see their highly educated graduates using well-paved roads to drive to job opportunities in other states.

A more effective option is to improve competition now so that Kansas can begin growing its way to prosperity today.

Chris Atkins is staff attorney and Jonathan Williams is an economist at the Tax Foundation in Washington, D.C.