Madam Chair and Members of the Committee:

Thanks for the chance to testify on HCR5014.

My title is Katherine Loughead, and I’m a Senior Coverage Analyst & Analysis Supervisor on the Tax Basis.

The Tax Basis is a nonprofit, nonpartisan, tax coverage analysis group primarily based in Washington, DC. For the final 87 years, we now have been working to advance sound tax coverage on the state, federal, and worldwide ranges.

The Tax Basis doesn’t take a place on laws, however I recognize the chance to offer some data on this material that I hope might be useful as you take into account this proposal.

To start out, a number of the concepts contained inside this decision have advantage and might be value contemplating. Nevertheless, I’ve a number of sturdy issues about varied provisions as presently drafted, so I want to take this chance to suggest potential options.

First, it’s necessary to know the underlying targets of this decision. Finally, HCR5014 seeks to create what is actually a state-run endowment fund to finance the eventual elimination of a number of taxes, together with the tangible private property taxA property tax is primarily levied on immovable property like land and buildings, in addition to on tangible private property that’s movable, like autos and gear. Property taxes are the only largest supply of state and native income within the U.S. and assist fund colleges, roads, police, and different providers. on motor autos (as proposed in a doable draft modification to the decision), state-levied and state-mandated property taxes (however not native property taxes), and the particular person earnings taxA person earnings tax (or private earnings tax) is levied on the wages, salaries, investments, or different types of earnings a person or family earns. The U.S. imposes a progressive earnings tax the place charges enhance with earnings. The Federal Earnings Tax was established in 1913 with the ratification of the sixteenth Modification. Although barely 100 years outdated, particular person earnings taxes are the most important supply, company earnings taxA company earnings tax (CIT) is levied by federal and state governments on enterprise earnings. Many firms are usually not topic to the CIT as a result of they’re taxed as pass-through companies, with earnings reportable beneath the person earnings tax., and state privilege taxes. As soon as these taxes are eradicated, the proposed constitutional modification would prohibit related taxes from being levied sooner or later. The principal deposited into the so-called “freedom from taxes fund” would come from modernizing the state’s gross sales taxA gross sales tax is levied on retail gross sales of products and providers and, ideally, ought to apply to all ultimate consumption with few exemptions. Many governments exempt items like groceries; base broadening, similar to together with groceries, might maintain charges decrease. A gross sales tax ought to exempt business-to-business transactions which, when taxed, trigger tax pyramiding.  base by eliminating varied gross sales tax exemptions.

Of those targets, the aim of decreasing reliance on earnings taxes is especially worthwhile. Whereas all taxes create financial drag, some taxes are far more economically dangerous and distortionary than others, so it is very important prioritize probably the most economically dangerous taxes for discount or elimination.

There’s a massive physique of financial literature displaying earnings taxes to be extra of an obstacle to financial progress and placement choices than well-structured gross sales or property taxes.^[1] Earnings taxes fall on financial savings and funding and cut back the capability for future consumption, whereas well-structured gross sales taxes are far more economically impartial.^[2] In the case of the company earnings tax, it is very important remember the fact that company earnings tax burdens are borne by staff within the type of decrease wages, shoppers within the type of increased costs, and traders within the type of decrease returns on funding. In the case of the person earnings tax, yr after yr, states with no earnings tax—or with a low, flat particular person earnings tax fee—outperform their friends in attracting new residents from different states.^[3] The Kansas Legislature subsequently has a possibility to assist foster larger financial progress within the state by rebalancing the tax code away from taxes on productiveness and towards much less dangerous taxes on consumption.

One other aim of this decision is to broaden the gross sales tax baseThe tax base is the whole quantity of earnings, property, belongings, consumption, transactions, or different financial exercise topic to taxation by a tax authority. A slim tax base is non-neutral and inefficient. A broad tax base reduces tax administration prices and permits extra income to be raised at decrease charges. by eliminating varied gross sales tax exemptions and depositing the extra income right into a “freedom from taxes fund” so the curiosity that accrues in that fund can be utilized to eradicate varied taxes. Modernizing the gross sales tax base is a worthwhile aim and has lengthy been one thing we now have beneficial Kansas policymakers work towards, however it’s completely important that any gross sales tax base broadening be completed correctly.[4] Most economists would inform you that retail gross sales taxes are designed to be a tax on ultimate private consumption solely, together with items and providers, however they need to not apply to business-to-business transactions (i.e., enterprise inputs).^[5] Taxing enterprise inputs causes dangerous tax pyramidingTax pyramiding happens when the identical ultimate good or service is taxed a number of instances alongside the manufacturing course of. This yields vastly completely different efficient tax charges relying on the size of the provision chain and disproportionately harms low-margin corporations. Gross receipts taxes are a first-rate instance of tax pyramiding in motion., the place taxes are levied at a number of phases of the manufacturing course of, with a lot of that tax burden getting handed alongside to shoppers within the type of increased costs. Then, when a shopper pays the gross sales tax on one thing they buy, they’re pressured to pay a tax on prime of the taxes that have been embedded within the worth of the nice or service.

Taxing enterprise inputs wouldn’t solely elevate taxes on Kansans in a nontransparent manner, however it might additionally make Kansas’s gross sales tax much less of a well-structured tax on consumption and extra like a poorly designed tax on the elements of manufacturing. This could harm enterprise funding and financial progress in Kansas, which might be counterproductive, since one of many most important targets of this decision is to advertise financial progress by eliminating the earnings tax.

To clarify in larger element why taxing enterprise inputs is problematic, it is very important word that Kansas’s gross sales tax, like most states’, is vacation spot sourced, that means it’s levied primarily based on the situation of the customer, or the place the customer takes possession of the merchandise, not the situation of the vendor. Which means taxing enterprise inputs would harm Kansas companies however not their out-of-state opponents. For instance, if Kansas have been to use its gross sales tax to advertising providers, a Kansas enterprise that hires an out-of-state advertising agency to generate a advertising marketing campaign must pay gross sales taxes on the value of these advertising providers, however an out-of-state enterprise that hires a Kansas advertising agency to generate a advertising marketing campaign wouldn’t should pay that tax. This could elevate prices on the Kansas enterprise however not the out-of-state enterprise, placing the Kansas enterprise at a aggressive drawback. If many various inputs are taxed or a enterprise depends closely on anyone taxable enter, this might affect companies to maneuver out of Kansas to keep away from this aggressive drawback.

One concern with HCR5014 as presently drafted is that it leaves all current gross sales tax exemptions on the desk for doable elimination, together with exemptions for providers and items which might be primarily, or oftentimes, bought as enterprise inputs. Since rising taxes on productiveness runs counter to the targets of this decision, gross sales tax exemptions for business-to-business purchases shouldn’t even be on the desk for doable elimination, and the one solution to assure that’s by setting these parameters within the underlying decision.

Individually, it is usually necessary to remember the fact that any enlargement of the state gross sales tax base would robotically have an effect on the native gross sales tax base as properly, since Kansas has a uniform state and native gross sales tax base. The income from increasing the state gross sales tax base could be deposited into the liberty from taxes fund, however the income from increasing the native gross sales tax base would go to native governments, which they might then doubtless use to extend native spending except the state enacts a regulation to require that further income be used to scale back different native taxes. Policymakers ought to subsequently take into account whether or not this enlargement of the native gross sales tax base with no different parameters surrounding it’s a fascinating end result.

This leads me to a different concern: that the decision, as presently drafted, would job an unelected “Kansas residents freedom assessment board” with the duty of figuring out gross sales tax exemptions for elimination, and any exemptions the board decides to eradicate could be eradicated with out an act of the legislature.

Whereas the decision does specify that the legislature would have the authority to move laws after the actual fact to reverse choices made by the residents board, repealing exemptions after which doubtlessly restoring them quickly thereafter would create uncertainty for taxpayers, instability within the tax code, and pointless turbulence within the policymaking course of. This might put legislators within the robust place of getting to reverse choices that the assessment board makes which might be unrealistic or not possible to uphold for authorized or structural causes, or that the legislature disagrees with as a matter of coverage.

However extra importantly, the legislature ought to finally make any gross sales tax base broadening choices as a result of the ability to tax is likely one of the basic powers granted to the legislature as an elected, responsive physique that’s checked by the governor. Authorizing a separate board to vary the regulation could be an abdication of the legislature’s proper and duty to make the tax coverage choices voters have entrusted to them. Any enlargement of the gross sales tax base needs to be completed rigorously and methodically, with the legislature main this course of, and with ample alternative for all legislators and stakeholders to offer their enter. If an unelected board is appointed to make these choices, then tax burdens might shift dramatically with no enter from policymakers instantly accountable to the individuals and topic to a legislative code of ethics.

But when policymakers don’t want to abandon the concept of a residents assessment board solely, one different might be to have this board function an advisory board that points a report with suggestions to the legislature, with the legislature sustaining the authority to make all choices about modifications to the regulation.

Moreover, it might be prudent for policymakers to contemplate including some primary parameters for the composition of any such assessment board throughout the underlying decision itself, fairly than ready to take action in a future implementation invoice after voters have already accredited the constitutional modification. For instance, to offer extra peace of thoughts forward of time, this decision might require {that a} sure variety of legislators, economists, and different consultants be included on the board. The sort of construction—one thing that’s extra like an advisory board or a blue-ribbon fee—has considerably extra precedent than a board that’s licensed to make policymaking choices outdoors the legislative course of. 

Now, I’d like to maneuver on to the principle substance of what this decision seeks to perform, which is to create what is actually a state-run endowment fund to finance the elimination of varied taxes.

The concept of an endowment fund is one thing that might be value contemplating, however I’d strongly encourage policymakers to contemplate phasing down the desired taxes over time as a substitute of ready till there may be sufficient curiosity within the fund to eradicate a specific tax altogether. For instance, if a regulation is enacted to eradicate roughly $1 billion value of gross sales tax exemptions, that will generate roughly $1 billion in further income that might be transferred to the fund every year as principal. So long as the principal stays inaccessible and an identical quantity of income is transferred to the fund every year, the quantity of curiosity would proceed to develop with the principal, even when a lot of the curiosity earnings is taken out on an annual foundation to assist part down varied tax charges over time.

Particularly, let’s think about $1 billion is deposited into the fund after the primary yr of a broader gross sales tax base. Assuming a 7.5 % annual fee of return, this is able to generate roughly $75 million in curiosity after the primary yr of funding, that means the next yr, policymakers might generate $75 million much less from varied taxes than they might have needed to elevate in any other case. After the second yr of a broader gross sales tax base and after the second yr of funding, assuming all of the gross sales tax base broadening from the earlier yr stays intact, the state would doubtless have roughly $2 billion of principal, even when not one of the preliminary curiosity stays within the fund, since that will have already been used to decrease tax charges. That $2 billion would hopefully generate roughly $150 million in curiosity after the second yr of funding, assuming the identical fee of return, that means tax charges for the next yr might be lowered even additional to generate as much as $150 million much less in income from the state’s taxes than would have been wanted in any other case. So, this strategy would enable the state to part out varied taxes over time by decreasing tax charges incrementally yr after yr.

It’s additionally necessary to contemplate how the state would wish to reply if the market had a tricky yr and the fund generated much less curiosity than anticipated. I’d encourage policymakers to contemplate including some buffer within the proposal in order that, for instance, solely 90 % of the curiosity accrued in anyone yr might be used to scale back tax charges, with the remaining particularly retained within the fund for use to stop tax fee will increase in leaner years.

Phasing down tax charges over time as I’ve described could be higher for taxpayers and higher for the economic system as a result of people and companies might begin benefitting from this proposal nearly straight away, a lot ahead of in the event that they have been pressured to attend till sufficient curiosity accrues within the fund to eradicate a tax altogether. This strategy would additionally make any gross sales tax base broadening extra palatable for taxpayers. Understandably, taxpayers could also be hesitant to simply accept paying doubtlessly billions of {dollars} in further gross sales taxes every year in the event that they know they must wait a few years earlier than they obtain any of the promised aid. If taxpayers know a few of these tax will increase might be offset nearly instantly, which will enhance the feasibility of the plan. Particularly, phasing down earnings tax charges over time would kick-start elevated in-state funding and financial progress nearly instantly, whereas the proposal as presently drafted would delay by many years most of that financial progress, particularly if the earnings tax is the final tax to be eradicated.

Now, I wish to flip again to the last word targets of this decision: eliminating the state portion of the property tax, in addition to the state’s earnings and privilege taxes, and doubtlessly first eliminating the state property tax on motor autos (as has been proposed in a draft modification to this decision). Of those three separate targets, working towards the eventual elimination of the earnings tax needs to be the best precedence as a result of earnings taxes are far more economically damaging than taxes on actual property. Of the varied sources of income state and native governments depend on to fund authorities providers, company earnings taxes have been proven to be probably the most economically dangerous, adopted by particular person earnings taxes, then gross sales taxes, after which property taxes.^[6] Subsequently, the state wouldn’t get a lot “bang for the buck” from relying extra on gross sales taxes so as to rely much less on actual property taxes, particularly since property taxes are arguably much less economically dangerous than gross sales taxes.

Whereas I can perceive why lawmakers want to take away the state property tax from the books, eliminating the state portion wouldn’t do a lot to scale back administrative burdens since native property taxes would nonetheless be levied. Eliminating earnings taxes, alternatively, would cut back administrative burdens considerably each for the state and for Kansas taxpayers, since earnings taxes take a number of time, effort, and cash each to adjust to and to implement—all of which is along with the earnings tax’s extra dangerous results on financial progress. Subsequently, it might make sense for policymakers to prioritize decreasing and even eliminating the state’s earnings and privilege taxes earlier than turning to different, much less economically dangerous taxes.

It is very important acknowledge {that a} draft modification to this decision proposes eliminating the tangible private property tax on motor autos earlier than eliminating different taxes, which might make sense as a result of doing so would take a a lot shorter time to attain, producing some momentum early within the course of. Moreover, working towards the repeal of the motorized vehicle tax could be worthwhile as a result of there may be far much less justification for levying property taxes on tangible private property like motor autos than on actual property like land and buildings. Whereas automotive taxes are extra of a nuisance tax than something, tangible private property taxes generally are antiquated, distortionary, and discourage in-state funding, so finally, Kansas policymakers ought to take into account transferring away from tangible private property taxes altogether.

So, when prioritizing varied property taxes to eradicate, policymakers ought to remember the fact that earnings taxes are extra economically dangerous than taxes on actual property, however tangible private property taxes, together with the motorized vehicle tax, are additionally value eliminating. If Kansas does finally achieve eliminating the state earnings tax, I agree it might be worthwhile to enshrine that coverage within the state structure, as this decision proposes, so future legislatures must make a really sturdy case for restoring the tax in the event that they finally want to take action.

Returning to the subject of increasing the gross sales tax base, it is very important remember the fact that, beneath the decision as presently drafted, this is able to be a sort of income enhance that will come with out different short-term advantages till there may be sufficient curiosity within the fund to eradicate a tax solely. Whereas the varied property taxes would presumably not take lengthy to eradicate, particularly if the preliminary funding is massive, the state’s earnings and privilege taxes would take many years to eradicate, and all of the whereas, Kansans could be paying extra in gross sales taxes yr after yr than they do now.

Not like most different varieties of tax will increase, beneath this plan, the extra income from broadening the state gross sales tax base couldn’t be used for any objective aside from to take a seat in a fund completely untouched, producing curiosity. This actuality might be one of many most important causes this sort of thought hasn’t been examined very extensively elsewhere. There’s a sturdy argument that attaining sustainable, long-term reform for generations to come back is well worth the disadvantage of paying increased taxes within the quick run, however that is solely true if the specified end result is efficiently achieved, which suggests it’s important to get the small print proper at each step of this course of.

One ultimate factor I’d like to say is that, whereas that is an fascinating concept that might be workable, taking this endowment fund-style strategy might be much more complicated than conducting many of those identical targets via extra conventional strategies. Earlier this yr, Kansas policymakers demonstrated commendable management by discovering a accountable manner to make use of extra earnings tax income above an inflationInflation is when the overall worth of products and providers will increase throughout the economic system, decreasing the buying energy of a forex and the worth of sure belongings. The identical paycheck covers much less items, providers, and payments. It is usually known as a “hidden tax,” because it leaves taxpayers much less well-off on account of increased prices and “bracket creep,” whereas rising the federal government’s spendin-adjusted FY 2024 baseline to part in a decrease, flat particular person earnings tax fee over time, after which to subsequently cut back the state’s company earnings tax and privilege tax charges. That regulation is well-designed and presents a mannequin for different states to observe. Transferring ahead, if Kansas policymakers are severe about modernizing the gross sales tax base, it might be worthwhile to contemplate adjusting Kansas’s current tax set off regulation barely in order that any inflation-adjusted common fund income progress above a specified quantity might be used to scale back varied taxes over time, beginning with the earnings tax. If all state common fund income, fairly than earnings tax income solely, have been the baseline, then any further income that is available in from gross sales tax base broadening would robotically be used to scale back earnings and privilege tax charges over time. 

Whereas a number of the underlying concepts in HCR5014 actually have advantage, I’ve severe issues about some elements of this decision as presently drafted. Nevertheless, I consider these points are solvable with the proposed changes I’ve talked about, if policymakers determine to pursue this feature.

In abstract, I’d encourage policymakers to authorize the legislature, not an unelected board, to make any gross sales tax base broadening choices; to take enterprise inputs off the desk in terms of choices for gross sales tax base broadening; and to contemplate what, if something, needs to be completed about the truth that the native gross sales tax base would develop together with the state gross sales tax base. If this physique decides to switch the proposed Kansas residents freedom assessment board into extra of an advisory board, policymakers ought to take into account creating some parameters for the composition of that board within the underlying decision to provide peace of thoughts to taxpayers. Moreover, I’d strongly encourage policymakers to contemplate phasing down varied tax charges over time, beginning with earnings taxes, as a substitute of ready till the fund has sufficient curiosity to eradicate a tax solely. Beneath this sort of phasedown design, it might be prudent to create a little bit of buffer to make sure tax cuts could be preserved, not reversed, throughout market downturns. Lastly, I’d additionally encourage policymakers to remember the fact that lots of the underlying targets of this decision might be achieved throughout the framework of Kansas’s current triggered tax discount regulation if a couple of modifications are made to that regulation.

Thanks once more for the chance to testify, and I’d be joyful to reply any questions.

[1] See, e.g., Jens Arnold, Bert Brys, Christopher Heady, Åsa Johannsson, Cyrille Schwellnus, and Laura Vartia, “Tax Coverage for Financial Restoration and Development,” The Financial Journal 121:550 (February 2011): F59-F80; Santiago Acosta-Ormaechea and Jiae Yoo, “Tax Composition and Development: A Broad Cross-Nation Perspective,” IMF Working Paper, October 2012; Dagney Faulk, Nalitra Thaiprasert, and Michael Hicks, “The Financial Results of Changing the Property Tax with a Gross sales or Earnings Tax: A Computable Common Equilibrium Method,” Ball State College, Division of Economics, Working Papers, June 2010; Stephen T. Mark, Therese J. McGuire, and Leslie E. Papke, “The Affect of Taxes on Employment and Inhabitants Development: Proof From the Washington, D.C. Metropolitan Space,” Nationwide Tax Journal 53:1 (2000): 119; and Joseph Bankman and David A. Weisbach, “The Superiority of an Perfect Consumption TaxA consumption tax is often levied on the acquisition of products or providers and is paid instantly or not directly by the patron within the type of retail gross sales taxes, excise taxes, tariffs, value-added taxes (VAT), or earnings taxes the place all financial savings are tax-deductible. over an Perfect Earnings Tax,” Stanford Legislation Assessment 58:5 (April 2010).

[2] William McBride, “What Is the Proof on Taxes and Development?,” Tax Basis Particular Report No. 207, Dec. 18, 2012, https://taxfoundation.org/what-evidence-taxes-and-growth/, 4.

[3] See Katherine Loughead, “People Moved to Low-Tax States in 2024,” Tax Basis, Jan. 7, 2025,” https://taxfoundation.org/information/all/state/americans-moving-to-states/, and Andrey Yushkov, “Taxes and Interstate Migration: 2024 Replace,” Tax Basis, Sep. 3, 2024, https://taxfoundation.org/information/all/state/taxes-affect-state-migration-trends-2024/. 

[4] Michael Lucci, Katherine Loughead, Janelle Fritts, and Jared Walczak, Kansas Tax Modernization: A Framework for Steady, Truthful, Professional-Development Reform, Tax Basis, Dec. 10, 2019, https://taxfoundation.org/analysis/all/state/kansas-tax-reform/.

[5] Jared Walczak, Modernizing State Gross sales Taxes: A Policymaker’s Information, Tax Basis, Sep. 5, 2024, https://taxfoundation.org/analysis/all/state/state-sales-tax-reform-guide/.

[6] Jens Matthias Arnold et al., “Tax Coverage for Financial Restoration and Development,” The Financial Journal.