Tuesday, October 21, 2014

Policy debate taxes nerves among leaders

By DOUG CARDER, Herald Senior Writer | 12/6/2013

[Editor’s note: The following is the second part of The Herald’s coverage of Tuesday’s legislative dinner at Neosho County Community College.]

The state Legislature’s 2013 tax bill set in motion the march to zero income taxes in Kansas.

[Editor’s note: The following is the second part of The Herald’s coverage of Tuesday’s legislative dinner at Neosho County Community College.]

The state Legislature’s 2013 tax bill set in motion the march to zero income taxes in Kansas.

The bill was heralded by state Sen. Caryn Tyson, R-Parker, as a step in the right direction toward encouraging new businesses to locate in the Sunflower State by cutting corporate income taxes, as well as helping all Kansans by putting more money in their pockets through cuts in personal income taxes, she said.

But state Rep. Blaine Finch, R-Ottawa, said the question lawmakers should be asking about the state’s tax policy is: “‘How do we get to fairness?’ not ‘How do we get to zero?’”

Tyson, Finch and state Rep. Kevin Jones, R-Wellsville, weighed in on the tax bill passed during the 2013 session, as well as issues that would be on the table during the 2014 session during the 2013 Legislative Dinner Tuesday at Neosho County Community College, 900 E. Logan St., Ottawa. The annual dinner — sponsored by the City of Ottawa, Franklin County and the Ottawa school district — attracted about 40 locally elected government and school district officials and administrators.  

Bill Allegre, Ottawa school board member, expressed concern that tax cuts passed during the previous legislative session would leave the state unable to fund public schools and other programs.

“There seems to be a storm looming on the horizon called declining state revenues, and the storm seems to be coming sometime very soon,” Allegre said. “And we’re assuming you’ll have the money to pay for our programs — I’m not so sure you will. I want to know what you are doing to get our house in order before the storm hits.”

Tyson told Allegre she didn’t think the state would see the decline in state revenues that he was forecasting.

“Revenues were not down until this quarter,” Tyson said. “The verdict is still out on it. I think there are businesses moving to the state [because of the tax cuts.] ... I think the legislation in the long run is going to help.

“It’s going to keep the money at the local level, and individuals are going to spend it or save it,” Tyson said, referring to the individual income tax cuts. “Whatever their choice is, but they know better — and wiser — how to spend their money.”

The compromise to the tax plan that ended the 2013 session kept the statewide sales tax rate at 6.15 percent — rather than rolling it back to 5.7 percent July 1. Keeping the rate at 6.15 percent was expected to generate an additional $1.1 billion dollars in revenue for state government over the next five years, according to government estimates. That money would be used to shore up the budget and to pay for cuts in individual income tax passed last year and future rate reductions included in the 2013 tax package, proponents of the tax plan said.

The tax agreement would lower the top individual income-tax rate from 4.9 percent to 3.9 percent by 2018 and reduce the bottom rate from 3 percent to 2.3 percent. The reduction in income tax rates moved the state closer toward Gov. Sam Brownback’s goal of eliminating individual and corporate income taxes.

Applying his high school economics teacher Chris Kornhaus’ seven guides to economic thinking, Ottawa native Finch found flaws with the tax plan.

“The first [guide to economic thinking] is there is no such thing as a free lunch,” Finch said. “There is no such thing as a free lunch when it comes to taxation, either. Taxes, as Mike Huckabee [former Arkansas governor and presidential candidate] said when he came to Ottawa and gave his speech, taxes are essential. And we as citizens in this Republic — and the Founding Fathers believed this too — that we had a duty to pay our taxes, and there is no such thing as zero taxes.”

Finch said he did not vote for the tax plan.

“I think it does move the burden from income to sales [taxes], and I think that disproportionately affects our senior citizens who are on fixed incomes, and it disproportionately affects the working poor who are trying to make ends meet,” Finch said.

While the wealthy have more choices about how they spend their dollars, the working poor do not, Finch said.

“The working single mother of two who has to spend 99 cents of every dollar she brings home to feed those kids, doesn’t have a choice,” Finch said. “And when the sales tax stayed at 6.15 percent instead of going to 5.7 percent so that somebody else didn’t have to pay a tax on an LLC they own, I’m not sure that’s the definition of tax fairness. I’m not sure that’s what the Founding Fathers had in mind.”

Actions speak louder than words, Tyson said.

“The Senate sent the House a bill that would have lowered [the rate to] 5.7 sales tax on food for everyone,” Tyson said. “How are you going to [help] the poor and elderly better than anything — food, medicine and property taxes. But the House rejected that bill. They absolutely said no.”

The senator said she did not know how representatives Finch and Jones voted on that bill.

“We sent the bill not once, but twice.”

Finch pressed his point, citing the Laffer Curve, developed by American economist Art Laffer, which shows the relationship between tax rates and revenues.

“[According to the Laffer Curve], 100 percent taxation equals zero revenue, because nobody is going to work if they have to pay all their money to the government,” Finch said. “[The Curve] also says at zero taxes you’re going to get zero revenue. But there is a point somewhere along that curve where you maximize revenue and fairness, and that’s the point we ought to be looking at. Not to tax people to death, not to strangle innovation, not to strangle entrepreneurship, but to encourage it responsibly, so we all share in the social costs of the services we enjoy.

“We all enjoy having public schools that give our students the freedom and fairness to start at an equal point in life,” Finch said. “Public education in our society is the great equalizer. ... Equality of opportunity, not equality of result — that’s the American dream.”

In addressing Allegre’s question, Jones said he shares his concerns about the economy.

“I’m not going to say there is no storm out there,” Jones said. “I think what we are trying to do is look further out and try to figure out something in the long run that is going to increase business and get us enough money down the road. That’s my hope.”

After speaking with lawmakers from neighboring states at some recent events, Jones said, he was encouraged that the Kansas tax policy is on the right track.

“They would ask me where I’m from, and I’d say Kansas. And they said, ‘Oh, Kansas. What you’re doing, you’re creating an environment [for entrepreneurs] to start their American dream and do things,’” Jones said. “So that was exciting for me personally to hear.”

Tyson and Jones said Kansas is developing a competitive advantage over Missouri by adopting a tax policy that is encouraging businesses to set up shop on the Jayhawk side of the border.

“Missouri has been very ambitious ... there is a border war going on. We know it. We’re close enough to fill it,” Tyson said.

Finch countered that if neighboring states adopt similar tax incentives, Kansas is back to square one — with less money in the coffers.

“Projections show for the next several years we’re going to overspend our budget in the state of Kansas,” Finch said. “We have to fix that, or we are going to run out of ending cash balance at some point. The gamble is from some that by cutting taxes we’ll encourage businesses to come to Kansas, and they’ll bring enough jobs we’ll have enough revenue coming in that that won’t happen, that the revenues will come back up. That’s the principle. Will it work? I don’t know. I have my doubts.

“If everybody has slashed their tax rates, nobody moves and we’re right back to where we started, with less money in the state treasury,” Finch said. “That’s the possible down side, but that’s the experiment we’re in right now.”

Tyson said the tax policy helps all Kansans, not just businesses.

“Our bills were increasing, and the results were not getting any better,” Tyson said. “We made a change in a direction for lower taxes for all Kansans. It was a cut across the board. It wasn’t just for businesses. It did lower personal income tax.”

On another business front, Tyson said, the regulation of corporate farming likely would come up in the 2014 session because of a proposed bill that would open up the entire state to corporate farms. Current state law allows counties to decide if a corporation can set up a farming operation in their county, she said.

“I think that’s fair,” Tyson said. “Each county knows better what their needs are, what suits them, but what this bill is proposing would remove that say at the county level. What it would do is allow corporate farming anywhere in the state. There would be no restrictions except for the city restrictions with the three miles [growth area]. It could change the dynamics of the state.”

Another issue lawmakers could take up in 2014 that would have statewide implications is defining what constitutes real property, Tyson said.

The discussion stems from a case a few years ago in Montgomery County, Tyson said, where a nitrogen fertilizer company, after a 10-year tax abatement — was expecting its first tax bill to be $400,000, based on a similar company’s tax bill in Ford County. Instead, the company received a tax bill of $10 million, Tyson said.

If manufacturing equipment, or trade fixtures, is allowed to be reclassified from real property to personal property, it could have a significant impact on property valuations in some counties and drive up local tax levies, legislative observers have said.

Brian Inbody, president of Neosho County Community College, expressed concerns about altering the definition of real property.

“I’m terrified of that real property [issue],” Inbody said. “Our biggest industry in my home county is Ash Grove [Cement Company, Chanute]. Thirty percent of the [assessed property] value of my county is in one business. If something happens to their valuation, it would have a tremendous impact on this college and this facility here [in Ottawa] as a result. So, we are watching with bated breath about if we are going to change the definition of real property for the state of Kansas. That could have rather large implications across the state and certainly for us.”

The Legislature needs to take its time and thoroughly review the issue, Tyson said.

“We have got to make sure we get that language correct,” she said.

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