The federal Tax Cuts and Jobs Act (TJCA) lowered taxes for millions of Americans and simplified the federal tax code. These reforms have spurred economic growth and record-low unemployment. To keep the momentum going, it is imperative for states to modify their tax laws accordingly, as the systems are intertwined. Like many states, Kansas is now considering how to respond to the federal tax reforms within its own tax code.
Under current Kansas law, Kansas taxpayers are unable to completely benefit from the federal tax reform because they are not allowed to itemize deductions on their state tax returns. One proposal, which has already passed the Kansas Senate, SB 22, would adjust the Kansas tax code to allow Kansans with itemized deductions totaling between $7,000 and $24,000 to continue to itemize on their state income taxes even if they take the standard deduction on their federal income taxes. This would allow Kansas taxpayers to continue to deduct items like mortgage interest, property taxes, and charitable contributions.
SB 22 also allows corporations repatriating foreign assets to the United States to avoid state taxes on that revenue. To avoid high U.S. corporate tax rates, U.S.-based companies operating internationally have kept their foreign earnings in subsidiaries overseas rather than bringing them back to the United States. They do this because U.S. marginal tax rates are, by some measures, the highest in the developed world. Some financial experts say the high cost of repatriating foreign earnings has led to billions of dollars in capital becoming “frozen” in the financial systems of more tax-friendly countries.
This reform would encourage companies operating in Kansas to make use of their freed capital in Kansas, increasing growth and innovation across the state. The bill is estimated to deliver around $137 million to corporations through repatriation and around $50 million to individual filers through restored deductions. It is expected to reduce state revenue by $191.6 million in the first year before shrinking to about $115 million annually. Under SB 22, both individual and corporate rates would remain the same.
SB 22 faces an uphill battle. Democratic Gov. Laura Kelly is expected to veto the bill if it reaches her desk because of concerns over how the federal reforms would affect Kansas revenue over the long term. If Kelly wants to wait and see what effects the federal tax changes will have on state revenue, there are alternatives that allow for tax cuts while ensuring budget discipline that have been recommended by the Tax Foundation.
Despite Kelly’s concerns, the state can use conditional mechanisms like tax triggers or contingent enactment clauses to phase in tax changes. Tax trigger language would allow Kansas to ensure adequate revenue exists to cover important budget items before any changes are made. This model has worked well in other states. Arizona and North Carolina have already successfully used a phase in model for their income tax cuts and have not faced serious budget issues. Kansas could also use contingent enactment clauses to allow for future reforms. These clauses allow for reform changes to occur predicated on a specific event occurring, such as federal tax reform.
Although SB 22 addresses some of the issues created by the federal tax changes, it does not take advantage of the changes by proposing wider reform. Several states have passed conformity laws as a springboard for tax reform through tax relief and rate reductions. For example, Missouri reduced its top individual income tax rate from 5.9 to 5.4 percent in 2019 and included triggers to reduce the rate to 5.1 percent based on revenue generation. Utah made similar changes, cutting individual and corporate income tax rates from 5 percent to 4.95 percent while increasing tax credits.
Providing a tax environment that encourages relocation, investment, and economic growth is essential for keeping Kansas competitive with its neighboring states. Kansas is ranked 28th in the Tax Foundation’s 2019 State Business Tax Climate Index, a study that compares states across multiple areas of taxation that impact businesses. Kansas’ ranking is lower than many of its neighboring states, including Missouri (14th), Colorado (18th), Texas (15th) and Oklahoma (26th). In Kansas’ region, states like South Dakota (3rd) and Wyoming (1st) rank far ahead of Kansas.
The following documents examine state tax reform in greater detail.
Are Kansans Preparing For More Tax Increases?
https://kansaspolicy.org/kansans-preparing-tax-increases/
Michael Austin of the Kansas Policy Institute discusses the many tax hikes Kansans have endured over the past four years and how Gov. Kelly’s rejection of SB 22 could lead to further hikes.
Toward a State of Conformity: State Tax Codes a Year After Federal Tax Reform
https://taxfoundation.org/state-conformity-one-year-after-tcja/
Jared Walczak examines how states are changing their tax codes in the year following the passage of federal tax reform.
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy?source=policybot
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Federal Tax Reform: The Impact on States
https://taxfoundation.org/federal-tax-reform-the-impact-on-states/
Nicole Kaeding and Kyle Pomerleau of the Tax Foundation examine the effect of the federal tax reform on the states and how they can use the changes to push for tax reforms of their own.
Tax Reform Moves to the States: State Revenue Implications and Reform Opportunities Following Federal Tax Reform
https://taxfoundation.org/state-conformity-federal-tax-reform/#9
This paper by Jared Walczak of the Tax discusses what options are available to states as they respond to federal tax changes. “In the wake of federal tax reform, states have a golden opportunity to move their own tax codes in a more simple, neutral, and pro-growth direction,” writes Walczak.
Rich States, Poor States
https://www.richstatespoorstates.org/
The eleventh edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
State Tax Conformity: Revenue Effects
https://taxfoundation.org/state-tax-conformity-revenue-effects/
On this webpage, the Tax Foundation has catalogued each state’s projected revenue impact of federal tax reform.
The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates
Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
The U.S. Tax System: Who Really Pays?
https://www.manhattan-institute.org/html/us-tax-system-who-really-pays-5748.html
Writing for the Manhattan Institute, Stephen Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness, addressing these statements and debunking attendant myths. He provides useful information on how the rich are taxed and how much they contribute.
The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates
Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
Policy Tip Sheet: Corporate Income Taxes
http://heartland.org/policy-documents/policy-tip-sheet-corporate-income-taxes
Taylor Smith examines corporate income taxes and their effects on economic development. Smith suggests how legislators can limit or eliminate their corporate taxes.
Balancing State Budgets the Smart Way
http://taxfoundation.org/article/balancing-state-budgets-smart-way
Joseph Henchman of the Tax Foundation examines an array of options states can use to remedy both short-term and long-term fiscal woes and put their budgets back on sounder legal footing.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
If you have any questions about this issue or The Heartland Institute’s website, contact Heartland’s State Government Relations Manager Lennie Jarratt, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
