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Analysis of Tax Policy from the 2019 Legislative Session

This presentation analyzes the major provisions of Senate Bill 22, including income tax itemized deductions, business income tax provisions, sales tax on food, and internet sales/use tax. It also introduces hypothetical taxpayers and discusses the fiscal effects of SB 22.

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Analysis of Tax Policy from the 2019 Legislative Session

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  1. Analysis of Tax Policy from the 2019 Legislative Session For Presentation at: Governor’s Council on Tax Reform Donna K. Ginther Professor, Department of Economics Interim Director, Institute for Policy & Social Research Research Associate, National Bureau of Economic Research

  2. Overview • Discuss major provisions of SB 22 • Income Tax Itemized Deductions • Business Income Tax Provisions • Sales Tax on Food • Internet Sales/Use Tax • Introduce hypothetical taxpayers • Yesterday’s presentations discussed the impact on corporate taxes. • Analyze the impact of Itemization and Food Sales Taxes on Food. • Thanks to the Dept of Revenue for their data and analysis!

  3. Senate Bill 22

  4. Itemized Income Tax Deductions • Tax Cut and Jobs Act of 2017, doubled the US standard deduction and child tax credit and as a result limited the number of people who could itemize tax deductions. • Kansas is a conforming state, making it impossible to itemize on state returns when not itemizing on federal returns. • SB 22 would have allowed Kansas taxpayers to itemize

  5. Business Income Tax Provisions • Tax Cut and Jobs Act of 2017 increased Kansas corporate tax revenue because of repatriation of foreign income and global intangible low taxed income (GILTI). • SB 22 would have retroactively exempted certain foreign income repatriated in 2017. • SB 22 would have exempted GILTI that is now being taxed federally. • SB 22 would have place limitations on deductions for interest and FDIC premiums.

  6. Sales Tax on Food • As of 2018, Kansas has the second highest food sales tax in the country (only Mississippi has a higher rate). • SB 22 would have reduced the sales tax on food from 6.5% to 5.5%

  7. Internet Sales/Use Taxes • The Wayfair decision by the US Supreme Court allowed all states to collect taxes from out of state retailers and marketplace facilitators. • The Wayfair decision triggered existing Kansas law requiring collection. • SB 22 would have exempted entities with less than $100,000 in total gross sales sourced to Kansas from having to collect sales tax.

  8. SB 22 Fiscal Effect Individual & Business Taxes Review from yesterday: SB 22 would generate several costs to The state general fund.

  9. SB 22 Fiscal Effect Sales Tax Reduction on Food & Internet Sales However, funds from Wayfair decision generates revenues.

  10. Total Fiscal Effect SB 22 Nevertheless, the net effect is a 2% reduction in the general fund.

  11. Hypothetical Taxpayers & Corporate Taxpayers

  12. Distribution of Kansas Taxpayers The majority of Kansas taxpayers have KAGI of less than $50,000

  13. Distribution of Kansas Taxpayers The median taxpayer pays a smaller share of income taxes

  14. Hypothetical Taxpayers • Kansas Department of Revenue tabulated tax returns by income level and dependents for: • Single • Head of Household • Married filing jointly • Married filing separately • We identified median federal adjusted gross income for those taxpayer categories to create hypothetical taxpayers.

  15. Hypothetical Taxpayers • Taxpayer 1: Single, 0 dependents, income $23,000 • Taxpayer 2: Head of Household, 1 dependent, income $32,000 • Taxpayer 3: Head of Household, 2 dependents, income $28,000 • Taxpayer 4: Married filing jointly, 0 dependents, income $79,000 • Taxpayer 5: : Married filing jointly, 1 dependent, income $85,0000

  16. Hypothetical Taxpayers • Taxpayer 6: Married filing jointly, 1 dependent, income $125,000 • Taxpayer 7: Married filing jointly, 2 dependents, income $95,0000 • Taxpayer 8: Married filing jointly, 2 dependents, income $150,0000 • Taxpayer 9: Married filing jointly, 3 dependents, income $125,0000

  17. Hypothetical Taxpayers • Not all taxpayers will be equally affected by a given policy. • As we address issues such as sales and property taxes, we will locate our taxpayers in different areas of the states to examine differences in tax burdens. • For example—what is the total tax burden (sales, property, income) for a married family with two dependents and an income of $85,000 owning a house valued at $250,000 located in Johnson county compared to the same family owning a farm in Riley county worth $250,000?

  18. Distribution of Kansas Corporate Taxpayers A few large companies paid 90% of corporate taxes in 2018

  19. Itemization of Kansas TaxesItemization vs.Reductions in Standard Deductions

  20. Why are we discussing itemization? • The 2017 federal tax law increased the standard deduction and child tax credit. • Fewer taxpayers could itemize • Kansas did not change its standard deduction • Kansas is a conforming state and fewer Kansas taxpayers could not itemize. • Itemization is only salient for higher income taxpayers.

  21. Costs and Benefits of Itemization • Decoupling from federal law could raise many administrative, enforcement, compliance issues by creating more complexity for taxpayers, tax practitioners and tax administrators alike. • Kansas Department of Revenue estimates an increase in administrative costs of approximately $3.3 million.

  22. Costs and Benefits of Itemization • Kansas Department of Revenue found that 108,386 taxpayers were no longer able to itemize in 2018. • Kansas collected $65 million in additional income taxes from these taxpayers. • However, the majority of this increase was from Kansas tax rate increases due to 2017 tax increase that also increased in 2018. • Net effect of reduction in itemization $15 million.

  23. Costs and Benefits of Itemization • Only about 14% of taxpayers would be itemizing if we de-coupled. • Based on current Kansas law, the estimated impact of itemization for future tax years is:  $35.6 million for TY2019, $60.3 for TY2020, and $60.9 million for TY2021.  • Senate Bill 30 in 2017 increased itemized deductions for medical, mortgage interest and property tax (which increases the number of taxpayers who might itemize).

  24. Itemization Scenarios • Kansas Department of Revenue has estimated several itemization scenarios. • Deductions for individuals: • Charitable Contributions $2000 • Mortgage Interest ~$4,125 • State & Local Taxes ~$4,469 • Real Estate Taxes ~$3,781 • Property Taxes ~$688 • Factor in changes in federal taxes and state taxes before and after changes in itemization.

  25. Hypothetical Taxpayer, Married Filing Jointly w/ $120,000 Income, 2 Dependents Both the standard deduction and the child tax credit doubled.

  26. Hypothetical Taxpayer, Married Filing Jointly w/ $120,000 Income, 2 Dependents Tax savings from difference between standard-itemized deduction x 5.7% tax rate.

  27. Hypothetical Taxpayer, Married Filing Jointly w/ $75,000 Income, 2 Dependents

  28. Hypothetical Taxpayer, Married Filing Jointly w/ $75,000 Income, 2 Dependents Tax savings from difference between standard-itemized deduction x 5.25% tax rate.

  29. Hypothetical Taxpayer, Married Filing Jointly w/ $75,000 Income, 0 Dependents

  30. Hypothetical Taxpayer, Married Filing Jointly w/ $75,000 Income, 0 Dependents Tax savings from difference between standard-itemized deduction x 5.25% tax rate.

  31. Fiscal Impact of 25% Increase in Kansas Standard Deduction • One approach that preserves conformability and benefits taxpayers is to increase the standard deduction. Here the Kansas Department of Revenue estimated a 25% increase in the standard deduction. Millions of dollars in tax year.

  32. Food Sales TaxesTax Cuts vs.Tax Rebates

  33. Research: Tax Incidence Will Provide • SB 22 proposed a 1% reduction in the food sales tax. • Local food sales taxes would not be affected. • Each 1% reduction in the sales tax would result in a $60 million reduction in revenue. • What is the impact of sales tax reductions on taxpayers? • What is the impact of food sales tax rebate?

  34. Fiscal Impact of Food Sales Tax Cuts Each 1% Reduction in Sales Tax will reduce funds for the general Fund and highways.

  35. What is the cost of Food Sales Taxes to Taxpayers? • Food sales taxes depend on household size and income. • Higher incomes and more people implies higher food expenditures. • We use the Survey of Consumer Expenditures for Midwest Households by income level to measure food expenditures. • Benefits accrue unequally.

  36. Impact of Food Sales Tax Cuts on Hypothetical Taxpayers Food Sales Tax Savings are Higher for Higher Income Taxpayers

  37. Food Sales Tax Refund Policies • Age 55 or over, disabled, or have dependents and meet income threshold • 2012 Food Sales Tax Refund: • $94 Per person Refund for Household Having "Income" of $18,350 or less • $47 Per person Refund for Household Having "Income" of $18,351 - $36,700 • Refundable Credit • 2013 Nonrefundable Credit • $125 per person "Non-refundable credit" for FAGI of $30,615 or less

  38. Food Sales Tax Refund Policies • Senate Bill 184 • $90 Per person Refund for Household Having "Income" of $18,350 or less • $44 Per person Refund for Household Having "Income" of $18,351 - $36,700 2013 • Refundable Credit

  39. Current Food Tax Rebate The current system is a non-refundable tax credit for people 55 or over, having a disability, or with dependent children under age 18 with federal adjusted gross income <= $30,615. Thus if other tax credits reduce taxable income, the rebate = 0. We model several scenarios for low-income taxpayers.

  40. Impact of the Current Program • In 2018, 87% of those claiming the credit were over the age of 55. • 34% had income from $25,000-$30,615

  41. Comparison to Alternatives • For each hypothetical taxpayer, we estimated the effect of the following policies: • Current law (non-refundable) • 2012 Food Tax Rebate • SB 184 • 1% Decrease in Food Sales Tax • 3% Decrease in Food Sales Tax • We calculated the net benefit of a policy change compared to the current law.

  42. Comparison to Alternatives Each rebate program creates winners and losers. Those above the Income threshold lose out. The food sales tax does not having a meaningful impact at 1% and Has a larger impact at 3% reduction. Expanding the income threshold and making the rebate refundable Would increase the impact.

  43. Conclusions • SB 22 would have de-coupled Kansas from the Internal Revenue Code. • Such a change would be costly and result in unintended consequences. • Kansas has a very skewed income distribution, which in turn, leads to a skewed income tax burden. • Corporate income taxes are even more skewed with 2% of corporations paying 90% of taxes.

  44. Conclusions: Itemization • Only 9% of taxpayers were affected by itemization in 2018. • Because of Kansas tax law changes, itemization would potentially cost Kansas taxpayers $61 million by tax year 2021. • Total savings for the highest income taxpayers would be ~$400 per year. • One alternative that would have a broader reach would be to increase the Kansas standard deduction.

  45. Conclusions: Food Sales Tax • Each 1% reduction in the food sales tax costs ~$60 million. • The benefits of the food sales tax cuts are enjoyed by higher income households because income and family size determine amount of food sales tax paid. • The current food sales tax credit is non-refundable and has a low income threshold. • Nevertheless, a comparison to a refundable tax rebate will create a different set of beneficiaries.

  46. Questions?

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