The largest tax increase in the history of the state of Kansas. That’s what Kansas Democratic Party Chairman Larry Meeker said of the legislation that was finally passed on June 12, 2015. That was a day after Gov. Sam Brownback went before a caucus of Senate and House Republicans and begged them to pass increases in sales and cigarette taxes. Along with the sales and cigarette increases, the legislation made changes to the state income taxes and property taxes.
A little history first. Back in 2012, Gov. Brownback oversaw a major decrease in the Kansas income tax. There were lower rates to be phased in but the big change was the exemption from tax of business profits. This applied to sole proprietorships, partnerships, LLCs and S-Corps. Kansas is required to balance its budget and the cuts to tax credits and programs did not offset the real world loss of income from the tax cuts. This left Kansas with an $800 million shortfall for 2015 and 2016 fiscal years. The 2015 deficit was covered by some service cuts, draining the rainy day fund and some accounting changes. But that left about $400 million to be made up in the 2016 budget which goes into effect on July 1, 2015. The tax changes passed last week are projected to bring in $384 million.
It was a contentious and marathon session. This year’s Kansas legislative session ran 113 days (a record) which is 23 days longer than the normal session. Each extra day costs the taxpayers about $40,000 for a grand total of $920,000. Money that could be much better spent.
The big change was the increase to the state sales tax. According to the Tax Foundation, Kansas now has the 8th highest sales tax in the United States. On July 1, 2015, the state sales tax rate will increase from 6.15% to 6.5%. This increase is hoped to bring in $164 million in fiscal 2016. This increase will hurt low to middle income taxpayers most since they will have to pay more for the basics; food and clothing. Please note, this is the state sale tax rate. Counties, cities, and townships have their additions to the state rate. (I will pay 8.75% beginning in July.)
Champions of the sales tax increase are quick to point out that there are some safeguard for lower income Kansans. Sales tax is not collected on food stamp purchases. And there is a Food Sales Tax Credit (FSTC) for households with income less than $30,615 (2014). The idea of the credit is to offset the sales tax paid on food for qualified taxpayers and it is part of the Kansas income tax return. The FSTC is $125 a person. For a family of 4, that would be a total credit of $500 BUT… First you have to be disabled, over 55 or have a child in the home. The big problem is that the credit is not refundable. It was refundable. But that changed in 2012 to help offset the business profit cuts. This hurts the seniors living on Social Security with a few small investments or pensions. They generally don’t have any taxable income or tax. That means no FSTC and the full brunt of the sales tax coming out of their pocket.
Kansans living near a border may be able to save some money by shopping in an adjacent state. The KC Star estimated that a Kansas City, KS family spending $200 a week on groceries could save $550 a year shopping in KC Missouri. (It doesn’t help me to go to Oklahoma to shop; their sales tax is as bad as in Kansas.)
The next big tax increase passed last week was an additional cigarette tax of $0.50 a pack this will include inventory the retailer has on hand. The new electronic cigarettes are also getting a tax of $0.20 a millimeter of combustible material. For someone smoking a pack a day, this could cost them $182.50 a year more. The extra cigarette tax is projected to bring in about $40 million in income. I project that a lot more Kansans, especially in my area will be going to Oklahoma to one of the smoke shops on tribal land.
The legislature has backed off the tax exclusion for some of the income from pass through entities like partnerships and S0Corps. Guaranteed Payments will now be taxable and add $20 million to the coffers.
Part of the 2012 tax changes included future tax rate reductions. The legislature has frozen these cuts until 2018. At that time, the lower rate of 2.7% will drop to 2.6% while the higher rate of 4.6% will remain the same. Savings projected are $26 million for 2016, $99 million for 2017 and $232 million for 2018.
The Kansas Department of Revenue expects to bring in $30 million by having a tax amnesty for unpaid tax bills from before December 31, 2013. Applications will be taken between September 1st and October 15th. More info when I find details.
Kansas itemized deductions took a big hit with the new law. In 2012, changes were made to itemized deductions to help pay for those tax cuts. Traditionally, Kansas had begun with the federal itemized deductions and subtracted the state income taxes to get the Kansas itemized deduction. Beginning in 2013, the state income taxes and charitable deductions were subtracted from the federal figure and the remaining deductions were given a “haircut” of 30%. The charitable deductions were then added back to get the new Kansas itemized deductions. The “haircut” was to increase each year until it reached 50%. Thanks to the new law the 2015 “haircut” will be 50% on mortgage interest and house taxes. This amount will be added to charity for the new and improved Kansas itemized deductions. That’s it. Charity and half the federal mortgage interest and real estate taxes are all you can take as Kansas itemized deductions. Gone are medical, casualty loss and miscellaneous deductions (gambling losses went in 2014.) This will bring in $97 million.
Getting past the basic loss of deductions for many taxpayers, this provision could really hurt some specific taxpayers. My first concern is the long distance truckers who are paid on a W-2 but are allowed to take the food allowance on Form 2016 which carried to the itemized deductions. The big losers may be seniors who are a nursing home and have been cashing in IRAs, pensions and investments to pay for their care. Their medical deductions help offset that income on their federal return but no longer in Kansas.
One tax cut? The legislature is expected to lose $19 million by excluding from income of “low-income” individuals. The income thresholds are $5,000 for single filers and $12,500 for married filers. Sound good? A single taxpayer got a standard deduction of $3,000 for filing single and one exemption of $2,250 for a total of $5,250 in 2014. Their taxable income is already zero. A married couple will only save the tax on $500 since their standard deduction and 2 exemptions already come to $12,000. The only taxpayers I can think this will benefit are those being claimed on another’s return and don’t get their exemption(s).
Property tax can’t be increased more than to adjust for inflation without voter approval. There is a list of exceptions to this rule and it won’t start until January 1, 2018.
I don’t have a crystal ball. I don’t know if these tax increases will provide enough actual revenue to cover the shortfall. It will be tight. The income loss from cutting business taxes was much higher than projected because more taxpayers took advantage of the policy by changing how they were paid. Human nature wasn’t factored in to the projections. Unless the legislature took into consideration more people shopping out of state or quitting smoking in their projections, the state may be in store for more deficits.