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In a recent column, Kansas Insight analyst H. Edward Flentje suggested that Kansas should appoint a commission to close tax loopholes patterned on the Base Realignment and Closure Committee process used by Congress. As Kansas moves headlong toward the balancing the FY2011 budget, state legislators should heed Dr. Flentje’s recommendation by including his proposal in any compromise budget passed this session.
Dr. Flentje’s main point is worth repeating. “Genuine free market advocates argue for a broader tax base with fewer exemptions, resulting in lower tax rates; they do not believe in an omniscient legislature choosing winners and losers when tax gifts are handed out.” Although many claim to be free market advocates in our fair state, few are in practice.
A true free market perspective is predicated on a very broad view of the state’s tax base. This means that the state’s tax base should include all property, no matter who owns it or its form (farm equipment and churches too), all income from all sources, and all sales of retail goods and services, no matter the type of good (this includes Girl Scout Cookies) or service (even services from hair stylists, plumbers, attorneys and accountants!) provided.
From a free market perspective, any tax exemption is considered an expenditure that should be included on the state’s finance statement; similar to any other expenditure of government funds (K-12 Education for example). Why? As Dr. Flentje states, “every exemption narrows the tax base and thereby increases pressure for higher tax rates” on those remaining taxpayers. Money not collected is the same as money spent.
To illustrate this point, let’s focus on the current application of the sales tax in Kansas. In 2005, the Hugo Wall School at Wichita State University estimated that the sales tax in Kansas applied to just over $35 billion of sales of retail goods, yielding $1.89 billion in sales tax receipts. Sounds impressive until one considers the fact the Kansas legislature exempts by statute over $68 billion of sales, or $3.6 billion in sales tax receipts. This is almost double the sales tax receipts collected in 2005. While I recognize that we (as a collective) may have sound free market reasons to continue to exempt the sales tax on items consumed in the production process (about $43.8 billion of sales in 2005), the alternative view is equally valid. If we had taxed all sales of all goods and remained revenue neutral for sales tax receipts in 2005, the state sales tax could be lowered to one third of its current rate, from 5.3 percent to about 1.9 percent.
But this is only part of the story with the sales tax. Currently, the sales tax does not apply to the sales of services ranging from haircuts to attorney’s fees. If we extended the sales tax to apply to the statutorily exempted services, we could raise about $258 million in sales tax receipts. This is about the same revenue Governor Parkinson’s one percent sales tax proposal. More significantly, if we taxed all services, broadly construed we would collect $1.9 billion in sales tax receipts. This amount is equal to what we currently collect through the retail sales tax. So, what does this mean? Well, if we remained revenue neutral for sale tax receipts in 2005, we could cut in half our existing sales tax rate, going from 5.3 percent to 2.7 percent.
If we used some combination of the above, we could dramatically reshape our state’s sales tax system to a lower rate applied across the board. Also, if we did decide to increase the sales tax rate, the rate of increase would be tenths of a percent versus an entire one percent as proposed by Governor Parkinson.
Of course, some may argue if Kansas moves to this new arrangement that we should at least exempt the sale of food, prescription drugs, and medical services. Perhaps, but every exemption opens the door for another “good cause,” which is the slippery slope that got us into our current mess. My opinion is that we should keep it simple and apply it to everything. This would make our sales tax very low (less than 2 percent) and the application of the sales tax proportional versus regressive as it is now. Moreover, it would shift the burden of the sales tax away from the main street retail sector, which currently bears the overwhelming burden of the sales tax, to all sectors of the economy. This is not only imminently fair; it’s also imminently rational.
Truth be told, at the end of the day, a few exceptions should survive. But Girl Scout Cookies? That should be $3.50 a box -- plus tax.
Joe Aistrup is a professor of Political Science at Kansas State University.
In a recent column, Kansas Insight analyst H. Edward Flentje suggested that Kansas should appoint a commission to close tax loopholes patterned on the Base Realignment and Closure Committee process used by Congress. As Kansas moves headlong toward the balancing the FY2011 budget, state legislators should heed Dr. Flentje’s recommendation by including his proposal in any compromise budget passed this session.
Dr. Flentje’s main point is worth repeating. “Genuine free market advocates argue for a broader tax base with fewer exemptions, resulting in lower tax rates; they do not believe in an omniscient legislature choosing winners and losers when tax gifts are handed out.” Although many claim to be free market advocates in our fair state, few are in practice.
A true free market perspective is predicated on a very broad view of the state’s tax base. This means that the state’s tax base should include all property, no matter who owns it or its form (farm equipment and churches too), all income from all sources, and all sales of retail goods and services, no matter the type of good (this includes Girl Scout Cookies) or service (even services from hair stylists, plumbers, attorneys and accountants!) provided.
From a free market perspective, any tax exemption is considered an expenditure that should be included on the state’s finance statement; similar to any other expenditure of government funds (K-12 Education for example). Why? As Dr. Flentje states, “every exemption narrows the tax base and thereby increases pressure for higher tax rates” on those remaining taxpayers. Money not collected is the same as money spent.
To illustrate this point, let’s focus on the current application of the sales tax in Kansas. In 2005, the Hugo Wall School at Wichita State University estimated that the sales tax in Kansas applied to just over $35 billion of sales of retail goods, yielding $1.89 billion in sales tax receipts. Sounds impressive until one considers the fact the Kansas legislature exempts by statute over $68 billion of sales, or $3.6 billion in sales tax receipts. This is almost double the sales tax receipts collected in 2005. While I recognize that we (as a collective) may have sound free market reasons to continue to exempt the sales tax on items consumed in the production process (about $43.8 billion of sales in 2005), the alternative view is equally valid. If we had taxed all sales of all goods and remained revenue neutral for sales tax receipts in 2005, the state sales tax could be lowered to one third of its current rate, from 5.3 percent to about 1.9 percent.
But this is only part of the story with the sales tax. Currently, the sales tax does not apply to the sales of services ranging from haircuts to attorney’s fees. If we extended the sales tax to apply to the statutorily exempted services, we could raise about $258 million in sales tax receipts. This is about the same revenue Governor Parkinson’s one percent sales tax proposal. More significantly, if we taxed all services, broadly construed we would collect $1.9 billion in sales tax receipts. This amount is equal to what we currently collect through the retail sales tax. So, what does this mean? Well, if we remained revenue neutral for sale tax receipts in 2005, we could cut in half our existing sales tax rate, going from 5.3 percent to 2.7 percent.
If we used some combination of the above, we could dramatically reshape our state’s sales tax system to a lower rate applied across the board. Also, if we did decide to increase the sales tax rate, the rate of increase would be tenths of a percent versus an entire one percent as proposed by Governor Parkinson.
Of course, some may argue if Kansas moves to this new arrangement that we should at least exempt the sale of food, prescription drugs, and medical services. Perhaps, but every exemption opens the door for another “good cause,” which is the slippery slope that got us into our current mess. My opinion is that we should keep it simple and apply it to everything. This would make our sales tax very low (less than 2 percent) and the application of the sales tax proportional versus regressive as it is now. Moreover, it would shift the burden of the sales tax away from the main street retail sector, which currently bears the overwhelming burden of the sales tax, to all sectors of the economy. This is not only imminently fair; it’s also imminently rational.
Truth be told, at the end of the day, a few exceptions should survive. But Girl Scout Cookies? That should be $3.50 a box -- plus tax.
Joe Aistrup is a professor of Political Science at Kansas State University.
