Following Governor Mark Parkinson’s lead, the Kansas legislature voted Tuesday to increase the state’s sales tax rate from 5.3% to 6.3%. Beginning in July of 2013, the increase will be scaled back to 5.7%. While this outcome is a disappointment relative to the sales tax base broadening discussed prior to the start of the session, the legislature should be applauded for including two progressive offsets aimed at mitigating the impact of the sales tax hike on the state’s most vulnerable families.
Over the Fiscal Year 2011-2015 period, the legislature’s plan returns about 5% of the revenue gained from the sales tax hike to the state’s lower-income families via a modest expansion of the state’s food sales tax rebate program and an increase in the state’s Earned Income Tax Credit (EITC) from 17% to 18% of the federal credit.
Unfortunately, while the increases in the sales tax rate and sales tax rebate are permanent, the EITC expansion will lapse in December of 2012. Given that low-income Kansans pay a larger percentage of their income in tax than anyone else in the state, lawmakers should consider making the EITC expansion permanent when the time comes to revisit this issue.
At least two points bear mentioning in reference to Kansas’ approach to its budget deficit. First, while the state should be applauded for taking a balanced approach that relies on both revenue increases and spending cuts, the state could have filled its budget gap by enhancing the progressivity of its income tax, which would have fewer consequences for low- and middle-income families. States without income taxes can be at least partially forgiven for relying on regressive taxes to raise revenue quickly during a recession, but Kansas already has an income tax in place and should have used this tool more directly to raise revenue in an equitable manner.
Second, if Kansas lawmakers were (unwisely) committed to avoiding an income tax increase, revenue could have been generated from the sales tax more efficiently by eliminating unwise exemptions, rather than raising the rate. A recent survey by the Federation of Tax Administrators focusing on 168 potentially taxable services found that less than half of these services are taxed within Kansas’ borders. Lawmakers should have taken the advice of the state’s Secretary of Revenue, as well as some of their own colleagues, and reformed the sales tax base, rather than simply raising the rate of a very imperfect tax.