Kansas City Star: Momentum grows to swap income tax for sales tax in states
media mentionBy DAVE HELLING
Talk about a tax break.
While all the attention this summer was focused on the federal debt and tax policy in Washington, some lawmakers and activists closer to home were quietly moving toward achieving a long-term goal: eliminating income taxes in Missouri and Kansas.
“The time has come,” said Jonathan Williams, director of tax and fiscal policy for the American Legislative Exchange Council, a national conservative group advising leaders in both states. “Of all the states considering this, both Kansas and Missouri are at the top of the list.”
Opponents of the plan in both states say they’re working to stop any effort to phase out the state income tax in exchange for a higher, broad-based sales tax. They argue that swapping the income tax for a sales tax would mean a multibillion-dollar shift in the tax burden from wealthy taxpayers to the middle class and poor.
But they also acknowledge that momentum is growing and may be difficult to stop.
“There’s no question about it,” said Missouri Sen. Jolie Justus, a Kansas City Democrat. “And people who are concerned about this proposal, which from what I’ve heard is most mainstream Missourians, should be talking about how to counter it.”
The push is slightly different in the two states.
Some Kansas lawmakers said they expect the administration of Gov. Sam Brownback to propose in January a phaseout of the income tax as part of a broader budget package. Brownback’s budget director, Steve Anderson, recently said he expects that next year’s spending blueprint will show “some significant (income tax) cuts.”
Dave Trabert, president of the Kansas Policy Institute, a conservative think tank, also predicted a renewed legislative debate over the tax swap.
“I think it’s going to be a major focal point in the 2012 session,” Trabert said. “If your focus is on what’s doing best for taxpayers … it’s something you should be running toward, not away from.”
Missouri’s income tax repeal effort, however, will probably be centered on the ballot box, not legislative chambers.
A representative of Let Voters Decide — the same group that spent more than $11 million to force earnings tax repeal votes in Kansas City and St. Louis — earlier this month filed papers to begin a petition drive aimed at putting income tax repeal on the November 2012 ballot.
The group’s constitutional amendment would phase out the income tax by 2016 and order the General Assembly to replace it with a capped sales tax.
“The downside of the tax swap appears to be minimal, if not nonexistent,” the American Legislative Exchange Council said in a report titled “The Missouri Compromise,” which promoted the income-tax-for-sales-tax trade.
The study conceded that repealing the individual income tax would blow a huge hole in the budgets of Missouri and Kansas. The tax currently provides roughly two-thirds of Missouri’s general fund and half of the general fund in Kansas — more than $8 billion combined.
Backers of the effort argue they would replace that revenue by raising sales tax rates, although such a move alone would probably not cover the entire deficit. Tripling Missouri’s sales tax rate to more than 12 cents on the dollar, for example, would still leave the state with much less revenue than the income tax and sales tax combination now provides.
The Let Voters Decide petition doesn’t come close to tripling the rate. Instead, it would broadly cap the state sales tax at 7 cents on the dollar once the income tax goes away in 2016, with an additional 3 cents on the dollar set aside for use by local governments.
But supporters maintain the states could solve that problem by cutting spending or — more likely — broadening the sales tax to cover hundreds of goods and services that are now exempt.
“We would have to expand the base,” said Marc Ellinger, a spokesman for Let Voters Decide, pointing to Tennessee as a good example of a neighboring state that doesn’t tax income but does tax sales.
Census Bureau figures show how it might work. Missouri collected $799 in individual income taxes per person in fiscal year 2009 and $852 per person in sales taxes a year earlier, a total of $1,651.
Meanwhile, Tennessee residents paid $1,452 in state taxes per person. But census figures show virtually all of it came from the state’s 7 percent sales tax — the fifth-highest sales tax collection rate in the nation. (Missouri’s basic sales tax rate currently is 4.225 percent.)
Opponents of income tax repeal argue that those numbers show the true impact of such a move. It dramatically shifts the tax burden away from the wealthy and onto people who buy goods and services.
“A lot of education needs to happen around this issue,” said Meg Wiehe, state tax policy director for the Washington-based Institute on Taxation and Economic Policy. “If you move to a consumption-based tax, the vast majority of taxpayers would likely pay more in taxes than they are under the income tax, except for the wealthiest.”
Repeal opponents also note that applying a sales tax to service providers such as lawyers and architects could harm places such as Johnson County, where service industries now thrive.
“Repealing the income tax in my mind doesn’t make a lot of sense,” said Kansas Rep. Mike Slattery, a Mission Democrat.
But supporters of repeal think they can answer those objections. The Missouri petition, for example, expands the sales tax to cover services, then lists a page and a half of services that would be constitutionally exempt from the levy. Among them are embalmers, child care providers and real estate appraisers.
The measure also would exempt food stamps, some medicine and most energy from the sales tax, among other things, while capping the sales tax on food at 5.5 cents per dollar.
In Kansas, the higher sales tax probably would not apply to business-to-business service transactions, Williams said. That could mean an individual hiring a lawyer would pay a sales tax on the bill, but a company hiring the same lawyer would not.
The complicated tradeoffs could confuse taxpayers, at least at first, critics say, and could lead to massive growth in barter and the underground economy.
They point out that voters and lawmakers in other states have rejected the income-tax-for-sales-tax swap once the full effect is understood. In 2008, for example, Massachusetts voters rejected an income tax phaseout.
Still, that record hasn’t deterred supporters of the idea. They say tax fairness is only part of their argument. Sales taxes, they contend, are easier to collect and would allow people to pay less taxes by buying fewer things.
And they say ending the income tax would encourage businesses to locate in Missouri and Kansas, providing jobs to the unemployed and boosting the states’ economies almost overnight.
“The income tax is a killer of jobs,” Williams said. “The best type of welfare the government can give is a good-paying job.”
The Missouri amendment would need roughly 145,000 valid petition signatures from six congressional districts to qualify for the 2012 ballot. If that happens, competitive pressure on Kansas to debate the idea is likely to grow, political observers say.
That means residents in both states may be asked — in an election year — to pick their poison: income tax or sales tax.
“It’s going to put every statewide candidate on the hook to take a position,” said longtime Missouri Republican consultant John Hancock. “And that will amplify the volume greatly.