Kansas Tax Reform & Relief, 2024: Details & Analysis
Despite working all legislative session on a major 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.
relief package, Kansas’ 2024 legislative session ended without an agreement. Three variations of an individual income, 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 package—HB 2284, the Senate Substitute for HB 2036, and the House Substitute for SB 37—were vetoed by Gov. Laura Kelly (D) despite the second bill passing unanimously in the House. Legislators’ two veto override attempts were unsuccessful, with the HB 2036 override attempt falling short by just one vote in the Senate. The governor has said she will soon schedule a special session to make yet another attempt at a deal.
Additionally, lawmakers may use a special session to further negotiate a controversial stadium funding proposal to attempt to lure the Chiefs and/or Royals to the Kansas side of Kansas City. When they return to Topeka, policymakers should prioritize pro-growth, structurally sound, and fiscally responsible reforms that would provide broad-based relief while improving economic competitiveness.
What Has Been Considered So Far?
Of the tax changes in the vetoed versions of HB 2036 and SB 37, on a dollar-for-dollar basis, reductions to the top marginal 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.
rate would provide the most bang for the buck in terms of promoting long-run economic growth and competitiveness in the Sunflower State. Notably, the proposals in both bills to pair rate reductions with a substantial increase in the personal exemption would ensure pro-growth reforms occur in a manner that would also provide substantial relief to low- and middle-income earners.
By comparison, various other provisions favored by policymakers on both sides of the aisle would make the tax code less neutral while doing far less to promote new investment in Kansas. For example, removing Social Security benefits from the income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
would do little to promote economic growth and would exacerbate the discrepancy between the tax treatment of Social Security income and alternative forms of income, including income earned through employment or saved in an individual retirement account (IRA) or 401(k). Narrowing the tax base in this way would make it more difficult to reduce the rates that apply to all 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.
, including wage income and all forms of taxable retirement income.
Additionally, dramatically increasing the amount of a residential property’s assessed value that is exempt from the statewide school property tax levy means less revenue will be available for income tax relief both now and in the future. Finally, while a law has already been enacted to significantly narrow the 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.
base by eliminating the sales tax on groceries on January 1, 2025, current proposals to accelerate the phaseout by reducing the rate from 2 percent to 0 percent six months early would cost the state an estimated $88 million that would otherwise go to the general fund and highway fund over the last six months of this year. On a dollar-for-dollar basis, income taxes do far more to hinder economic growth and in-state investment than residential property taxes or consumption taxes, so policymakers should keep these economic trade-offs in mind when deciding which taxes to cut, and by how much.
As further consideration is given to these or other proposed tax changes, policymakers should prioritize broad bases and low rates—the hallmarks of structurally sound tax policy—and de-prioritize changes that would narrow the tax base while yielding negligible economic benefits.
Individual Income Tax Rate Reductions Would Improve Kansas’ Competitiveness
Since 2021, 26 states—including all of Kansas’ neighbors—have permanently reduced their individual income tax rates, with all but three of those states reducing their top marginal rate. In 2021 and 2022, five states enacted laws reducing rates while converting to single-rate structures. Bracket consolidation has been common in other states as well, with the number of total income tax brackets across all states dropping by nearly 22 percent over the past decade. Across all 50 states and the District of Columbia, the median top marginal state individual income tax rate has dropped in recent years to 5.12 percent, but Kansas’ top rate remains notably higher, at 5.7 percent.
Over the past four legislative sessions, states have prioritized income tax reform and relief for good reason. Of the major tax types, corporate income taxes tend to be the most economically harmful, followed by individual income taxes, while well-structured sales and property taxes are far less economically damaging. Economic studies show that reductions to top marginal rates are associated with higher wages for higher- and lower-income workers and do more to promote economic growth than exemptions, deductions, and credits.
Of reforms considered so far this year, legislators’ initial proposal to adopt a single individual income tax rate of 5.25 percent, while increasing and 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.
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 (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.
and personal exemption, would have provided the greatest economic benefits because labor and investment decisions are made based on how taxes affect the next dollar of income earned, and a lower, single-rate structure would reduce Kansas’ current tax penalty on labor and investment on the margin. Short of moving to a single-rate structure, reductions to the top rate would improve the state’s competitive standing while giving Kansas’ businesses more margin to hire more employees, increase wages, and expand operations.
HB 2036 and SB 37 contain only modest reductions to the top marginal rate, bringing it from 5.7 percent to 5.55 or 5.57 percent, respectively. By comparison, since 2021, 20 states have reduced their top marginal rates by at least 0.15 percentage points (the amount proposed in HB 2036), while 19 of those states have reduced their top rates by at least 0.25 percentage points and 10 by at least one percentage point. Given the outsized economic benefits associated with reductions to the top rate, policymakers should prioritize such reductions over other less valuable changes.
How Much Tax Relief Can Kansas Afford?
One of the biggest points of disagreement in Kansas’ tax relief deliberations has been the question of how much relief to provide.
State revenue forecasters estimate Kansas will end FY 2024 with a $2.7 billion budget surplus and nearly $1.7 billion in the rainy day fund. By comparison, the most recently vetoed tax relief package would have cost less than $2.4 billion over five years, meaning even if state revenues remain stagnant for each of the next five years, the state would still have revenues from the existing surplus after June 30, 2029, without even touching the rainy day fund.
The governor has repeatedly used terms such as “reckless” and “fiscally irresponsible” to describe the vetoed tax relief packages that many members of her own party supported, but these characterizations lack substance. The tax changes in the most recent legislation would reduce annual revenues by about $430 million compared to the current law baseline, which equals 4.1 percent of state general fund expenditures and 1.7 percent of total planned state expenditures for FY 2025. These figures are a far cry from the Brownback-era tax cuts of $900 million on a $6 billion general fund budget that were enacted at a time when Kansas did not even have a rainy day fund.
What about a Stadium Deal?
Finally, some Kansas policymakers want to use a special session to negotiate a stadium subsidy deal to lure the Kansas City Chiefs and/or Royals to the Kansas side of Kansas City using Sales Tax and Revenue (STAR) bonds.
A controversial legislative framework discussed in a conference committee would authorize billions of dollars of new STAR bonds to finance, over 30 years, up to 100 percent of the cost of new stadium and practice facility developments. Such a plan would allow the diversion, over three decades, of billions of dollars of sales tax revenue, and possibly even excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.
revenue, generated from businesses in the specified districts to repay the bonds.
Research on stadium subsidies overwhelmingly shows that costs to taxpayers typically far exceed the economic benefits associated with new stadium developments. Furthermore, projects financed by Kansas STAR bonds have a lackluster track record, with sales tax revenues oftentimes turning up short and an auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return.
showing only three of 16 evaluated STAR bond projects met the Department of Commerce’s goals in 2018 or 2019. If Kansas policymakers are truly committed to fiscal responsibility, they will think long and hard before dedicating billions of dollars of future sales tax collections to finance private developments.
Conclusion
Tax reform and relief is long overdue in Kansas. Over the past few years, Kansans have watched as all their neighbors—and scores of states across the country—have adopted meaningful income tax reform and relief laws that have boosted their competitive edge.
With a robust surplus and plenty saved for a rainy day, Kansas can afford substantial tax relief, but not all tax relief is created equal. In any special session, policymakers across the political spectrum should consider the economic trade-offs associated with various kinds of tax relief and prioritize reforms that would promote long-run economic growth while maintaining a structurally sound tax base.
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