Kelly and Republicans agree Kansas should cut taxes. They don’t agree on how to do it

Kansas Gov. Laura Kelly became governor on a promise to repair the state’s finances after the repeal of a predecessor’s tax cuts She.began the first budget proposal of her second term with a request for tax cuts.

Kansas, like many other states, is flush with cash as a result of inflation and windfall from federal COVID-19 relief dollars.

As a result Kelly, a Democrat, is advocating for what she describes as sensible tax legislation — an immediate elimination of sales tax on food, diapers and feminine hygiene products, a four-day sales tax holiday for school supplies and reduced income taxes on Social Security.

The cuts, which Kelly calls the axing the taxes plan, account for $500 million in cuts over three years. It’s roughly the same amount that just two years ago Kelly said would “blow a hole” in Kansas’ budget.

“The axing your taxes plan delivers responsible relief right now,” Kelly said at an event Wednesday. “Again, we will need bipartisan support.”

Her proposals were formally introduced to the Kansas House and Senate Thursday.

But, much like her first four years in office Kelly is contending with a Republican supermajority that wants to be more aggressive in some areas and block Kelly in others.

Republican leadership is pushing to follow other conservative states instituting a flat or single income tax rate for Kansans. And Senate President Ty Masterson, an Andover Republican, wants to limit the food sales tax cut to healthy food only.

Both proposals are sure to garner steep opposition from Kelly and her Democratic allies in the Legislature.

But the discussions are almost certain to be looped in with broader conversations of tax policy, including the one area where both parties appear to agree — income tax cuts on social security.

“I’m so excited for the possibility of all of us working together and finding solutions for Kansans,” Sen. Caryn Tyson, a Parker Republican who chairs the Senate Taxation Committee. “I’ve always been asking for tax cuts and now I’ve got other people asking for tax cuts.”

Food sales tax

Elimination of the food sales tax was a major plank of Kelly’s reelection bid. She held numerous events last year in grocery stores across the state wielding a small hatchet as she urged the elimination of the tax and promoted the bill the Legislature ultimately passed.

But she wasn’t finished.

In a move viewed by many as a political effort to deny an election year win Republicans in the Legislature passed a bill that reduced the sales tax gradually over years before an eventual elimination in 2025. Kelly had requested a full and immediate elimination.

Kelly is now asking, yet again, for immediate elimination during the 2023 session.

But immediate elimination could represent a financial tradeoff with other spending or tax cut priorities.

“It’s a math problem,” said Rep. Adam Smith, a Weskan Republican who chairs the House Taxation Committee. “At this point it’s not political, there’s not an election coming up. So I just want to make sure that if there is an effort to go ahead and accelerate that and take it all the way to zero that it’s something we can sustain.”

In the Senate, Masterson wants to study options for limiting what food is brought to zero.

“There’s conversations about what is healthy, go ahead and take healthy food right to zero because that’s what you’re trying to incentivize. I don’t know that you need to take potato chips and candy,” he said.

He offered few details on what healthy food would include, saying that would be part of the legislative process.

A spokesman for Masterson said several pathways for this could be considered including moving unhealthy food back to a 6.5% sales tax or cutting healthy food to zero immediately while allowing sales tax to phase out on the rest.

Kelly dismissed Masterson’s suggestion speaking to reporters at an event touting her food sales tax proposal, Wednesday.

“We just don’t need to complicate this,” Kelly said. “We need to do it as fast as we possibly can.”

If Kansas pursued such a cut it would be the only state in the nation to enact a policy targeted at healthy food only, said Richard Auxier an analyst at Urban-Brookings Tax Policy Center who also served on Kelly’s tax council in her first term.

Some states have specific additional taxes on items targeted as unhealthy, such as candy and soda, but taxing only unhealthy food could create a logistical nightmare for vendors, he said.

When Kansas began dropped its food sales tax from 6.5% to 4% on Jan. 1, it prompted immediate confusion for vendors who mistakenly charged the wrong rate in early days.

“You are inviting a lot of fights and a lot of work if you do this,” Auxier said.

A flat income tax?

Kansas Republicans, and the Kansas Chamber of Commerce, are eyeing steep changes to income tax this year.

Currently, Kansans pay income tax on a progressive system split into 3 rates determined by income level. The lowest rate is 3.1% the highest is 5.7% and sets in at $30,000 annual income.

Last year four states, including nearby Iowa, scrapped that system, instead instituting a flat income tax that takes effect regardless of income level.

Masterson insisted such a change could come without impacting Kansas’ overall tax revenues.

“Flat’s just take whatever your resources are and flatten out the amount and collect roughly the same amount of money,” Masterson said. “We might be in an interesting situation where Laura might be more comfortable with a bigger number than I am.”

The argument for the tax is that it makes Kansas a more competitive state to work and do business because it lowers the tax burden for some of the population.

However, it is likely to receive steep opposition from Democrats, who view it as nothing but a tax break for the wealthy and will likely hearken back to budget shortfalls that resulted from major income tax cuts under Gov. Sam Brownback.

“When people are moving to a state that’s not really what at the top of their mind, the state tax rate,” said Rep. Tom Sawyer, a Wichita Democrat who is the top Democrat on the House Taxation Committee. “When you pay taxes the biggest portion is the federal income tax.”

Breaks for the wealthy, Auxier said, are likely to shift the tax burden to low and middle income families.

“The sole reason you use flat tax rates is to push the burden to lower income households,” he said.

Kelly didn’t directly respond to a question about whether she would support a flat tax, but said she would evaluate tax proposals based on whether they would help all Kansans, “particularly those in most need.”

Tyson, the Senate tax chair, said she was preparing to introduce a bill that would raise the threshold to be eligible for income tax so more low-income Kansans would see no income taxes.

“We’re doing the math, asking for quite a few scenarios,” she said.

This strategy will be easier in Kansas than other states because of Kansas’ existing tax base, said Katherine Loughead, a policy analyst with the Tax Foundation, a conservative leaning think tank.

She said the simpler tax rate keeps Kansas in line with neighboring states like Colorado that have instituted a flat tax rate.

“The tax rates do create a barrier to upward mobility,” she said.

Taxing retirement benefits

Next week, Tyson plans to begin holding hearings on legislation to eliminate sales tax on Social Security income, an area where both parties have a relative amount of agreement.

Kelly has proposed a bill that simply reduces those taxes, eliminating a current policy that taxes no income below $75,000 and fully taxes income above $75,000.

The proposals before the Kansas Senate go further. One would immediately eliminate all taxes on Social Security income, while the other gradually phases it out to zero while reducing income tax on other retirement benefits as well.

Sawyer said he was comfortable with eliminating all income tax on Social Security but saw an equity issue when other retirement benefits were concerned.

“They can now set up Roth types of accounts where they pay the taxes up front, and there’s a lot of people that do that,” Sawyer said. “It would be really unfair for people that did that.”

The retirement issue, however, is likely the first piece lawmakers will make a decision on.

“That has good bipartisan support on all sides,” Smith said. “I think that would be a good one to start off with and let’s all come together and have a little kumbaya moment.”