Economy

After Cutting Taxes On The Rich, Kansas Will Raise Taxes On The Poor To Pay For It

CREDIT: AP

Kansas lawmakers concluded the longest legislative session in state history Friday night by approving a slate of regressive tax hikes that will balance the state’s budget by targeting low-income workers and their families.

More than half of the $384 million in new revenue expected from the tax hike will come from cigarette taxes and sales taxes, two policies described as “regressive” because they fall more heavily on lower-income taxpayers than on the wealthy. Even though everyone who shops will pay the new 6.5 percent sales tax rate – up from 6.15 percent in previous years, and the 8th-highest of any state according to the Tax Foundation – the move is regressive because poorer shoppers already have to stretch each dollar farther than their more flush counterparts.

The state offers a limited tax credit for grocery purchases to low-income families that slightly offsets the unevenness of the sales tax impact. But that credit is capped at $500 and cannot be claimed by families earning over $30,615 a year. A family of four that earns too much to qualify for the credit will pay nearly $700 a year in sales tax payments on their food, according to a Kansas City Star analysis of Friday’s bill that found the bulk of the burden falls on people making less than $50,000 annually.

Families with more slack in their budgets to absorb the sales tax hike are also getting to retain the vast majority of the windfall delivered to them in 2012 and 2013 by Gov. Sam Brownback’s (R) massive tax cuts for the wealthy. Those packages drove rates up for the poorest 20 percent of the state, provided a very small net reduction in tax liabilities for middle-class earners, and gave about $20,000 a year on average back to the richest hundredth of taxpayers.

Friday’s bill keeps those windfalls in place, while delaying a further reduction in income tax rates that was part of Brownback’s previous initiative. It barely exacts any toll from the top end of the income spectrum, mostly by reducing the proportion of property tax and mortgage interest payments that are tax deductible in the state.

The bill also partially reverses Brownback’s most aggressive and disastrous tax cut. The governor had eliminated all state income taxes on so-called “pass-through” income, an accounting maneuver by which everyone from authors to corporate lawyers can arrange to be paid as though they were a small business owner. The much-criticized choice cost the state $206.8 million in 2013 alone as tens of thousands more Kansans than predicted rushed to join the tax-free jamboree.

Friday’s bill restores $23.7 million of that last revenue, or about a ninth of what the pass-through exemption costs Kansas. Brownback had pledged to veto any proposal to fully restore taxes on pass-through income according to the Tax Foundation, even as lawmakers floated the idea to end an emergency extended session that was costing taxpayers $43,000 per day.

The token contributions that these on-paper small businesses and individual high-income Kansas must make under Friday’s law are far outstripped by what the state’s leaders are demanding from citizens who are least able to shoulder a higher share of the cost of having schools, roads, and hospitals.

In total, 42 percent of the cost of Friday’s bill will come from sales taxes and 10.5 percent will come from a 50-cents-per-pack cigarette tax hike. Another quarter of the revenue comes from the tax deduction changes, which also appear to be regressive given data on what classes of earners have claimed which types of deduction in the past.

Just 6 percent of the new money will come from people who escaped all income taxes in the past two years by routing their wages through a small business “pass-through.”

Distributing the cost of an organized society in this regressive way is a political choice, not an economic imperative. Brownback’s budget director made the case for sales tax hikes as the primary mechanism for addressing the shortfall by warning lawmakers that anything else would have forced another round of stiff cuts to schools funding, Medicaid reimbursements, and criminal justice work. But alternative approaches that break with Brownback’s own ideology would have been just as feasible on a practical policy level.

And it’s not as though Friday’s vote means all is well with Kansas’ public services. The state’s funding of schools has repeatedly been deemed unconstitutional by state courts, which may yet decide that the legislature’s attempt to rectify the funding bill this spring was insufficient. That measure shifted money around the school system in response to judges’ past rulings, while cutting total classroom funding by $127 million in the middle of a school year.

Even without another judicial intervention on school budgets, public education and all other state services are looking at a cloudy horizon. The bill passed Friday righted the budget deficit on paper for one year. But lawmakers will face another $400 million projected gap in the following year unless revenues from Brownback’s slashed income tax system leap up at an unusual rate. When the time comes to deal with that hole, the state will already have exercised many of the budget tricks and regressive tax ideas that Brownback considers politically palatable.