Have you heard of the incoming tax increase? To maintain a statutorily required 7.5% ending balance, policymakers must find a way to close a $2 billion gap and slow the rate of state spending. The overspending includes an initial $1.3 billion shortfall , a $115 million KPERS payment, and the $270 million in new demands for school funding by the plaintiffs in the Gannon lawsuit. However, not all hope is lost. Policymakers can avoid this shortfall if they focus on limiting spending without cutting services. If not, the needed tax increase will undoubtedly make Kansas a more-costly place to live.
To better grasp this fiscal dilemma, let’s split this shortfall into two pieces; education and everything else. By 2023, the extra school funding will create a $979 million budget gap. What’s left, including state agency and other spending, is an additional billion dollar tab for taxpayers. The table below outlines the extra spending by year. What is the impact on taxpayers to cover the increase in spending and oncoming shortfalls? Financing the K-12 increases solely through property tax can be telling. As is paying for the non-K-12 items with sales OR income taxes.
Using the mandatory 20 mills levied by statute and their projections of property tax, we estimated the amount of property tax per 1 mill. This is done by dividing the total property tax by 20 mills which gets 1 mill valued at roughly $34 million. As property tax revenues grow over time so will the value of 1 mill. How many mills are needed for added K-12 spending from FY 2020 to 2023? The answer is an extra 10 mills. Kansans are already feeling property tax increases due to accelerating appraisals. Sadly, an increase of 10 mills risks taxing Kansans out of their homes.
We estimated the sales tax increase needed to pay for the non-education funding pieces using a similar method. We divided the extra non-education spending by sales tax revenue in that year , so that we have spending as a share of the 6.5% sales tax rate. How high must state sales tax be to pay for the extra non-K12 spending? The answer is a 7.45 percent state sales tax rate, and that’s before any local tax rates are applied.
However, estimating income tax hikes needed for the same spending calls for a different method. The Kansas Department of Revenue provided 2017 total Kansas adjusted gross income (KAGI) and taxes paid broken out by 7 different KAGI groups. A 2016 version of this table can be viewed in their tax revenue report. For every KAGI group, we estimated their effective tax rate (taxes divided by KAGI) and found the rate needed to finance the extra spending. In our calculation we tried to keep the progressivity and other quirks of Kansas’s current tax code the same. We found Kansans will have to pay an extra 0.55 percentage points to cover the extra billion-dollar spending. For context, the current bottom tax rate of 3.1 percent would need to be 3.65 percent, and the top rate would jump from 5.7 percent to 6.25 percent.
Here are the changes to property, sales, and income tax rates.
As an example, paying 30 mills on real property means a family with a home valued at $200,000 would pay $621 instead of $414. That’s a tax increase of $230 or 50%. On sales tax, Kansans spend roughly $14,000 (goods and recreational services) a year on sales taxable items. A state sales rate of 7.45% means paying roughly $1,043 a year instead of $910, a tax increase of $146 or a 16% . This would give Kansas the highest sales tax in the nation.
Relying on income tax instead of sales tax would only worsen the effects on Kansas families. A family of four making the state average income of $97,000 would pay $4,123 instead of $3,680, a $443 or 12% tax increase over 2019. What’s worse is income taxes can be more harmful than sales tax because it grows with compounding interest. Similar to a high sales tax, high income taxes shrink consumer purchases today. However, its compounding effect also discourages investment and consumer sales in the future.
Whether it’s property, sales or income taxes, it can be difficult to argue the need for raising rates. Pushing taxes higher may better finance accelerated government spending, but it has a harmful impact on Kansans. However it’s important to note tax increases are not a destined path for Kansas families and businesses. There are always two sides of the budget; legislators can avoid the conundrum of picking tax increases if they are willing to hold back state spending.
