Kansas Flat Tax Reform & Relief: Details & Analysis
Kansas has begun its fifth consecutive legislative session under politically divided government, with Republicans holding a slim supermajority in the legislature while Gov. Laura Kelly (D) begins her second term as governor. After years of strong revenue growth, the state has substantial cash reserves on hand, and policymakers on both sides of the aisle have expressed a desire to return some of the extra revenue to taxpayers. There are many similarities between the legislature’s proposal and the governor’s proposal, but the income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
reform provisions in the legislature’s proposal would promote greater long-term economic growth and competitiveness in the Sunflower State.
House Bill 2284, the legislature’s tax reform and relief package, passed the House and Senate in mid-January but was vetoed by Gov. Kelly on January 26th. An override attempt is expected. If adopted, H.B. 2284 would make several improvements to the state’s individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
structure while also providing various forms of targeted sales and property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.
relief. The governor’s own proposal, introduced as H.B. 2586, contains several tax relief provisions that are similar—and in some cases identical—to the plan passed by the legislature.
The similarities between the two bills are numerous: both proposals would reduce privilege tax rates on financial institutions, accelerate the ongoing phaseout of the statewide sales tax on groceries, exempt all Social Security benefits from state income taxes retroactive to the start of the year, increase to $100,000 the amount of a residential property’s appraised value that is exempt from the statewide property tax levy for schools, and increase from 17 to 18 percent the allocation of sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.
revenue to the state highway fund.
The key difference between the two bills is their different approaches to individual income tax reform and relief. The legislature’s plan would convert Kansas’ three-bracket individual income tax with a top marginal rate of 5.7 percent into a more neutral and less economically harmful single-rate tax on taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
above $6,150 for single filers and $12,300 for married couples filing jointly. (No income tax would be imposed on the first $6,150/$12,300.) It would also increase the personal exemption by $50 per taxpayer, spouse, and dependent, and—importantly—index the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.
and personal exemption to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
to preserve the real value of these benefits over time.
Meanwhile, the governor’s proposal would keep Kansas’ graduated individual income tax rates as is while increasing the standard deduction from $3,500 to $5,000 for single filers and from $8,000 to $10,000 for married couples filing jointly. Under the governor’s plan, neither the standard deduction nor personal exemption would be indexed to inflation, meaning that while an initial increase would provide short-term relief, the real value of these benefits would erode over time, as has already occurred for many years in Kansas. Additionally, for taxpayers who are eligible to claim the federal income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
for household and dependent expenses, the governor’s proposal would increase the state credit from 25 to 50 percent of the federal credit amount, and H.B. 2586 would also create a new sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.
for feminine hygiene products and children’s diapers.
Across both bills, many of the proposed tax changes are highly targeted, offering relief to groups of taxpayers in certain situations but stopping short of reforming the tax code in a manner that would improve the state’s long-term economic outlook. The main exception to this is H.B. 2284’s proposed consolidation of the state’s three income tax brackets into one and the lowering of the top marginal rate from 5.7 to 5.25 percent. Numerous studies have shown a correlation between the lowering of a state’s top marginal individual income tax rate and increases in in-state investment, GDP growth, job growth, wage growth, and inbound migration. Personal and business decisions about labor, relocation, and investment are made on the margin—that is, based on how taxes will affect the next dollar of income, not previous dollars of income. As such, lowering the top marginal rate while moving to a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets.
structure would provide a much greater economic benefit than a one-time increase to the standard deduction.
Under the governor’s proposed changes to the standard deduction, the maximum annual tax savings any taxpayer would receive is $85.50 for a single filer and $114 for a married couple filing jointly. While most taxpayers would welcome any additional tax savings, a modest increase to the standard deduction would have only a minimal economic impact, as it would not change incentives for work, investment, or job creation, decisions that are all influenced by marginal tax rates, not a higher standard deduction. Ultimately, a lower, flat income tax rate, combined with inflation indexingInflation indexing refers to automatic cost-of-living adjustments built into tax provisions to keep pace with inflation. Absent these adjustments, income taxes are subject to “bracket creep” and stealth increases on taxpayers, while excise taxes are vulnerable to erosion as taxes expressed in marginal dollars, rather than rates, slowly lose value.
of the standard deduction and personal exemption, would do more to remove barriers to upward mobility in Kansas and provide greater tax savings to most Kansans over the course of their working lives than a proposal that increases the standard deduction while leaving Kansas’ top marginal rate as is, above the national median.
When it comes to adopting pro-growth reforms that will improve Kansas’ long-term competitiveness, there’s no better time than the present because the competition is heating up. In fact, Kansas is surrounded by states that have all reduced their top marginal individual income tax rates at least once—and in many cases more than once—within the past three years alone. And the latest interstate migration data from the U.S. Census Bureau show Kansas lost, on net, 0.2 percent of its population to outbound moves in FY 2023.
While taxes are just one factor contributing to a state’s overall economic competitiveness, they are an important factor and one that is within policymakers’ control. In FY 2023, of the 12 states that currently levy flat individual income taxes, all but four experienced net inbound migration. Lower rates also correlate strongly with in-migration. Year after year, states that have a low, flat individual income tax—or no income tax at all—have proven much more attractive to interstate movers than their high-income tax counterparts.
If all the tax reforms included in H.B. 2284 were in effect today, Kansas would have moved into the top half of states on the 2024 State Business Tax Climate Index. As Kansas policymakers continue deliberating on important matters of tax policy in the days ahead, priority should be given to tax changes that provide broad-based tax relief while improving tax structure and laying the groundwork for stronger economic growth and competitiveness for many years to come.
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