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From Governing’s
But these sources weren’t enough. The legislature ultimately raised taxes by some $252 million, primarily through a temporary hike in the sales tax rate from 4.9 percent to 5.3 percent (scheduled to go back to 5 percent in 2005) and a 55-cent jump in cigarette taxes.
It was no surprise, in the aftermath of September 11 terrorism, that Kansas was going to have to do something to raise revenues, whether the money came from new or old sources. The state’s aviation companies — Boeing, Cessna and Raytheon among them — have eliminated some 10,000 jobs in the months since the terrorist attacks. Add in the disastrous effects of last year’s drought on state agriculture, and the overall manufacturing recession, and tax increases were as clear as an F5-level tornado on the flat Kansas plains. Although political pressures made even modest tax increases difficult, in hindsight it would have been smart for the legislature to push a little further. Receipts have continued to lag in recent months, and revenue forecasts have had to be revised downward by another $218 million. Now, Kansas leaders have to fill that gap, and it’s not going to be easy. “Everybody in the building knew they needed to raise taxes $500 million to $600 million,” says one high-level government adviser. “The political heavens align to raise taxes once a decade. If they knew they had to vote for a tax increase, why didn’t they go for what they needed?” Republican Senate President Dave Kerr answers that question by pointing out that the increase approved last year came to about 5.1 percent of total taxes and arguing that there was no way the votes could be found to do more — then, or now. In any event, Kathleen Sebelius, the state’s new Democratic governor, is on her own “top-to-bottom” hunt for funds to fill the coffers. Part of the examination will include a review of the state’s laundry list of exemptions and credits, although it’s unlikely that any of the really expensive or popular ones, such as the tax credits for business equipment and machinery or the partial rebate for the sales tax on food, will be eliminated. The truth is that not all of the financial trouble can be blamed on the poor economy; some of the lost revenue can be traced back to the state’s own corporate tax policies. There are no fewer than 17 corporate tax subsidies in the Kansas revenue code, and in recent years, companies have become extremely aggressive about cashing in on them. According to a study conducted last year by the state Legislative Division of Post Audit, the number of corporations claiming income tax credits increased from about 700 in 1995 to nearly 5,000 in 2001. To complicate the problem further, the state Supreme Court ruled against the Department of Revenue last year in a case challenging the department’s threshold for combined reporting — the means by which a company and all of its subsidiaries are required to file a return in one state. The court held that Kansas authorities did not sufficiently communicate their rules to businesses. This cost the treasury $25 million in refunds and interest to one company alone and may force reconsideration of the entire combined-reporting test. The only silver lining is that, in the long run, the dispute could lead to a stiffer set of combined-reporting regulations and make it harder for corporations to divert income to subsidiaries located in other states or countries. The Post-Audit Division recently made several recommendations to improve corporate tax collection, including stepping up the audit process. Back in the early 1990s, Kansas developed a reputation for overly aggressive audits; in subsequent years, they were scaled back. As a result, collection of additional revenue through audits fell from $20.7 million in 1995 to a low of $5.9 million in 2000, according to the Legislative Research Department. “It’s been an honor-system tax,” says an analyst in that department. The Revenue Department acknowledges that the number of audits dropped as resources were diverted to a new computer system in the late 1990s but says they’ve increased back to “business as usual.” Some corporate officials say the expanded audits aren’t unwelcome. “Most companies would rather have everybody audited than have their taxes raised,” says Mark Beshears, a telecommunications executive and former state revenue secretary. To its credit, Kansas was one of the few states in the country to increase resources for its Revenue Department in the past two years. In FY2001, the department received $3.5 million to hire 72 new collection agents; thanks to the implementation of new compliance programs, they collected about $103 million. Auditing will soon receive some help from a new data warehouse, put in as part of the Revenue Department’s integrated tax information system. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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ast year, with personal income tax receipts down by 8 percent from 2001, and corporate income tax revenues sliced in half, Kansas lawmakers confronted a budget gap of close to $300 million. Their first step was to turn to a variety of one-time revenue sources, including a transfer of transportation money into the general fund and a temporary decrease in the required year-end budget balance, from 7.5 percent to 5 percent.