UPDATED: Flat tax proposal would cost more than $3 billion over three years

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(Updated to include comments from the Chamber of Commerce, Kansas Action for Children and the top House Democrat)

A proposal to move the state to a flat tax would cost Kansas more than $3 billion over three years, according to a fiscal analysis released Monday morning.

The analysis shows that a bill calling for a 5% flat tax would cost the state $428 million in the first year and grow to $1.45 billion in the second year and $1.5 billion in the third year.

Introduced by the Kansas Chamber of Commerce, the bill was an effort to simplify the tax code, although critics immediately said it would return the state to the tax-cutting era of former Gov. Sam Brownback.

“The projected cost of a flat tax proposal is troubling,” said Emily Fetsch, director of fiscal policy for Kansas Action for Children.

“It is extremely short-sighted to use one-time surplus revenue for a permanent change,” Fetsch said in an email.

“We know this will get us right back where we were nearly a decade ago: crumbling roads, underfunded schools, and cuts to public safety.”

The proposal for a flat tax comes at a time when the state is sitting on a slightly more than $2 billion surplus for the fiscal year ending this June 30.

The surplus is expected to grow to more than $3 billion in the next fiscal year.

The bill would set a rate of 5% for corporations, which now pay 4% on net income plus 3% on net income exceeding $50,000.

It also lowers the tax for banks and savings and loans, a move intended to reflect the same percentage increase in the corporate tax code.

The bill lowers the rate for banks to 3.13% from 4.375% and the rate for savings and loans to 3.21% from 4.5%.

The bill also would buy down income tax rates using revenues in excess of estimates.

The bill calls for reducing the income tax rate to zero, which led some critics to sound alarms about how such a plan might affect the state’s fiscal outlook.

The chamber’s proposal is much more expensive than a 4.75% flat tax that was proposed for individual taxpayers last year.

The bill from last year, which would have cost about $500 million over three years, did not include corporations and didn’t buy down tax rates like what’s proposed in the new legislation.

The chamber saw the new bill as an initial offering for debate this session and not the finished product ready to go to the governor.

“As we said before, our bill was introduced as a starting point for comprehensive tax reform and focused on preventing a tax increase for those earning under $15,000,” the chamber’s top lobbyist, Eric Stafford, said in an email.

“Obviously the bulk of the relief goes to individuals. Now we just need to work through the process with lawmakers to craft a well-rounded, comprehensive plan over the next few months,” Stafford said.

Since 2021, the number of states with flat income tax structures on the books has climbed from eight to 13.

In the last two years, five states – Arizona, Iowa, Mississippi, Georgia, and Idaho – have moved from a graduated income tax rate to a flat individual income tax.

Supporters of the flat tax say it’s simple, fair and promotes growth. Opponents say it hurts low-income earners while benefiting more wealthy taxpayers.

“Graduated-rate tax systems penalize productivity and hinder upward mobility, while flat tax structures are more conducive to long-term economic growth,” said Katherine Loughead, senior policy analyst with the conservative-leaning Tax Foundation.

Individual income tax rates in Kansas are now set at 3.1% for earnings under $15,000 or $30,000 for married couples filing jointly.

The rate is 5.25% for income between $15,000 and $30,000 or $30,000 to $60,000 for married couple filing jointly.

Earnings are taxed at 5.7% for income of $30,000 or more for individuals and $60,000 or more for married couples.

There were about 161,000 married taxpayers who filed joint returns in 2020 and earned less than $30,000 a year in taxable income, according to data obtained from the Kansas Department of Revenue.

By comparison, there were about 381,000 married taxpayers who filed joint returns in 2020 and made more than $60,000 a year, according to state data.

Stafford disagrees that the flat tax would disproportionately hurt the less advantaged by forcing them into a higher tax bracket.

He notes that the chamber’s proposal exempts income under $15,000 for single filers and $30,000 for married couple from income taxes.

Under the current system, those low-income earners – of which there are more than 400,000 single filers earning under $15,000 in Kansas – now pay 3.1% in income taxes.

Stafford said income under $15,000 for single filers and under $30,000 for married filers was exempted to address concerns about hurting the less affluent.

The flat tax would be a significant departure from Democratic Gov. Laura Kelly’s proposal to accelerate elimination of the state sales tax on food, create a sales tax holiday for school supplies and cut taxes on Social Security income.

Kelly’s proposal costs roughly $540 million over three years.

Kelly has urged the Legislature to adopt a tax plan that was “responsible,” not something that would throw the budget into disarray.

Kelly in a recent interview expressed reservations about a flat tax and what it might mean for low-income earners in Kansas.

“I don’t know that the flat tax is so much irresponsible as incredibly regressive and unfair,” Kelly said in an interview with the Sunflower State Journal.

“I’ve always seen the flat tax as regressive,” she said. “I am not enthusiastic about it.”

House Minority Leader Vic Miller said the chamber’s tax plan would benefit the wealthy at the expense of the less affluent while torpedoing the state’s budget.

“This legislation will pull us right back into the Brownback dumpster fire, famous for making Kansas a late-night television punchline,” Miller said in a statement.

Senate President Ty Masterson said he supports a flat tax, but in a recent interview said he would like to work with the governor on a tax package.

He would like to see a package that addresses the food sales tax, eliminates the tax cliff on Social Security income and flattens income tax rates.

“I’m optimistic we can even get to signature,” Masterson.