This policy proposal is part of the Sandlian Center for Entrepreneurial Government’s 2019 Legislator’s Budget Guide. Find more proposals here.
In the wake of the U.S. Supreme Court’s rulings this year, that authorizes states to legalize sports betting and tax out of state sales, policymakers see opportunities to increase government revenue and support more spending. However, the new taxing authority presents a different opportunity; reduce the tax burden on Kansas families.
History has shown that the state of Kansas has a spending problem. Politicians passed the largest tax increase in state history knowing spending growth will create a deficit by 2019. This budget challenge also comes about as Kansas has the 8th highest sales tax rate in the nation, and high excise tax rates compared to surrounding neighbors. Taxing out of state sales and sports gambling creates opportunities to reduce taxes and make Kansas more competitive.
With that said, any legislative action proposed on these new avenues must follow a few guidelines. This is because taxes shouldn’t take a dollar more than needed for essential government services. Excessive taxation on sports gambling and out of state sales will only encourage illegal activity and forgo state revenue. There are three principles to keep in mind.
1) No Retroactive Taxation
Don’t penalize law-abiding taxpayers for their past actions by passing retroactive tax legislation. Retroactively taxing sports gambling or out of state sales undermines confidence in the tax system and stagnates economic growth. The state of Kansas passed a retroactive tax increase on Kansans’ income in 2017. Not surprisingly, the state economy plummeted to the 41st fastest growing state in the country in the same year.
2) Don’t Tax Mom and Pop Shops
It is inefficient for government to tax everything that moves. It raises compliance costs for small businesses far beyond what they can handle. Additionally, the taxpayer dollars spent enforcing taxation on every small out of state business isn’t worth the tax revenue received. Tax policy should create a safe passage for small businesses with little economic nexus, or presence, in Kansas. Policymakers should keep the focus on the businesses that primarily drive the activity.
3) Commonality Between State and Localities
Kansas policymakers should create the same tax base between the state and localities. For out of state sales, Kansas’s inclusion in the Streamlined Sales and Use Tax Agreement already provides uniformity when it comes to the setting what products and services are subject to sales tax. However, no such uniformity guidelines exist between state and local governments when it comes to sports gambling. Will Kansas only authorize taxation of sports gambling from casinos? Will large cities like Wichita want to tax online sports betting while the state does not? Whichever policymakers decide, having the same base will make it easier for tax administration. It will also help keep business accounting and legal costs moderated.
State government taxes will be less volatile if the steps outlined above are followed with a low tax rate. However, this should not be taken as justification to increase government spending. Policymakers should take great care in considering revenue estimates of forthcoming legislation. When the state raised the excise tax on cigarettes to $1.50 per pack the tax revenue expected never materialized, even after accounting for slippage to other states. Excise tax, by itself, is erratic. Therefore, tying spending plans to sports gambling will only lead to fiscal trouble. As for out of state sales, Wayfair already encourages large retailers to pay tax to Kansas. Retroactive taxes on out of state mom and pop shops simply does not work and scares away commerce.