By Gene Meyer | Kansas Reporter
TOPEKA — Kansas tax hawks shrieked over the state’s dead-center ranking of its business climate.
But the ranking was better than the same survey in 2011 conducted by the nonpartisan Tax Foundationresearch organization in Washington, D.C. The 2012 survey was released Jan. 26.
The Tax Foundation, formed in 1937 to help track federal spending during the New Deal of the Great Depression era, has since become a major advocate of tax education for the public.
“One spot, to 25th place?” asked Gov. Sam Brownback, who said Friday he had not read the national survey. “That’s not going to move much.”
The key to boosting Kansas’ status is in cutting or eliminating taxes, but which taxes?
Brownback asked Kansas legislators last month to cut the state’s current top 6.45 percent personal income tax rate to 4.9 percent and to eliminate taxes on non-wage income paid by small business owners. Many small business owners pay taxes on their business income at personal rates and, Brownback said, the changes will spur faster business growth and more economic activity in the state.
Kansas legislators are scheduled next week to begin digging into details of that plan and a half dozen others that propose to reduce or eliminate various business and consumer taxes in 2013 and beyond.
Any such cuts could bump Kansas’ tax-friendly ranking higher, though by how much is impossible to tell now, said Mark Robyn, the Tax Foundation economist who calculated the foundation’s state-by-state 2012 State Business Tax Climate Index.
“States don’t make tax changes in a vacuum,” Robyn said. “Every tax law, in some way, changes their position compared to other states.”
Many states’ rankings changed because Illinois last year passed a raft of tax changes to deal with its budget crisis, dropping it from 28th to 44th in the Tax Foundation rankings.
Even so, Kansas’ one-step increase for 2012 “is a meaningful change,” Robyn said. “You made a slight cut in your corporate tax rate, to 7 percent from 7.6 percent, which is why your ranking rose.”
Kansas, like many other states, relies heavily on four kinds of taxes to produce the largest share of its tax revenue each year. The three biggest usually include personal income taxes, sales taxes and property taxes. Many states, including Kansas, also collect corporate income taxes, but those totals are generally smaller.
Kansas ranks near center or below other states in most of those categories, Robyn said. Even its recently improved corporate tax ranking leaves Kansas with only the 35th friendliest tax rate in that category. The state ranks 21st in taxpayer friendly income-tax policies; 32nd for sales-tax collections and 28th in property-tax treatment.
Most states with the friendliest tax policies for business development — nine of the top 10 — have been building their tax policies around eliminating one or more of the big four categories, Robyn said. Income taxes and corporate income taxes are the most frequent targets.
Many of the tax plans that Kansas legislators are working on this session call for eliminating or sharply reducing income taxes. Doing that would not guarantee Kansas a listing among the top 10, Robyn said, “but among the top 15 would be reasonable.”
Tax comparisons are more important regionally than nationally, said Ernie Goss, a Creighton University economist who conducts monthly surveys of business conditions and the economy in Kansas and other Midwestern states.
“Comparing policies in Kansas versus New York isn’t as meaningful as Kansas versus Missouri, Kansas versus Oklahoma, Kansas versus Colorado or Kansas versus Nebraska,” Goss said.
“Businesses that are looking to relocate pick the region they want to be in, then look at their choices within that region,” he said.
In Kansas, where those comparisons count most is the Johnson County suburbs of Kansas City, Mo, one of the state’s largest population centers, Goss said.
It’s easy for businesses there to move to Missouri. The Tax Foundation ranks the overall tax climate 15th best in the nation for businesses, with slightly higher personal income taxes than Kansas and significantly lower corporate, sales and property taxes.
Colorado, ranked 16th on the report also tops Kansas. Nebraska, ranked 30th and Oklahoma at 33rd both come in lower.
“Then, those differences matter,” Goss said.
Such calculations are trickier from taxpayers’ points of view, said Aaron Popelka, an executive of the Kansas Livestock Association, the state’s largest group of cattle producers.
“We don’t want any tax reductions to be made up with increases in property taxes,” Popelka said. Farm and ranch land are among livestock producers’ largest assets, and taxes on them are major business expenses.
“But we don’t want to hurt business, either,” he said.
Low cattle numbers mean that many U.S. meat-packing plants can buy 80 percent to 85 percent of the cattle they need to slaughter each day to run a profit, Popelka said. Some may close either temporarily or permanently if that continues. Drought in Texas, Oklahoma and Kansas has helped drop U.S. cattle numbers to their lowest levels since 1952, the U.S. Agriculture Department reported in January.
“We don’t want to be the reason that any plant closes in Kansas,” he said. “There would be one less buyer in the market for our cattle and prices would be lower.”
Kansas’ economic growth is lagging behind its neighbors, though tax policies aren’t the only reason, said Jeremy Hill, executive director of Wichita State University’s Center for Economic Development and Business Research.
Kansas continues to recover more slowly from the Great Recession than its neighbors partly because it fell in more slowly.
High commodity and energy prices early in the recession helped offset other economic losses. The state is more dependent on international markets for everything from commodities to aircraft, and those are now beset by political uncertainty, volatile energy prices and the European debt crises.
Tax policy is important too, “but most tax policy takes a long time to take full effect,” Hill said. “You’re talking at least a year, and in many cases, three years or longer.”