Kansas sales tax exemptions don’t hold all the advertised allure

Advocates of eliminating sales tax exemptions in Kansas point to the great amount of revenue that could be raised if Kansas eliminated these exemptions, estimated at some $4.2 billion per year. Analysis of the nature of the exemptions and the amounts of money involved, however, leads us to realize that the additional tax revenue that could be raised is much less than spending advocates claim, unless Kansas was to adopt a severely uncompetitive, and in some cases, unproductive tax policy.

Tax exemption policy is an important economic policy matter. A recently-released study by the Kansas Legislative Division of Post Audit is titled Kansas Tax Revenues, Part II: Reviewing Sales Tax Exemptions. In its background discussion, the report noted “the U.S. Supreme Court’s opinion that tax exemptions and tax deductibility are a form of subsidy that is administered through the tax system. A tax exemption has much the same effect as a cash grant to the organization of the amount of tax it would have to pay on its income.”

Sometimes these tax exemptions are issued to specific organizations. Others are issued to organizations that fall within certain categories. In this case, the exemption is like an entitlement, granted to any organization that falls within the scope of definition of the exemption. Some exemptions are for categories of business activity that shouldn’t be taxed.

It’s this last category that is important, because of the large amount of economic activity that falls within its scope. An example is exemption 79-3606 (m), described as “Ingredient/Component parts: Of items manufactured or produced for sale at retail.” The audit report estimates that for 2009, this exemption cost the state $2,248.1 million in lost sales tax revenue.

But this exemption isn’t really an “exemption,” at least if the sales tax is a retail sales tax designed to be levied as the final tax on consumption. That’s because these goods aren’t being sold at retail. They’re sold to manufacturers who use them as inputs to products that, when finished, will be sold at retail. Most states don’t tax this type of sales. If Kansas decided to tax these transactions, it would place our state’s manufacturers at a severe disadvantage compared to almost all other states.

There are two other exemptions that fall in this category of inputs to production processes, totaling an estimated $461 million in lost revenue.

Another big-dollar exemption is “items already taxed” such as motor fuel. This is an estimated $232.5 loss in revenue. Two other categories of exemptions are purchases made by government, or purchase made by contractors on behalf of government. Together these account for an estimated $449.9 million in lost revenue. If these two exemptions were eliminated, the government would be taxing itself.

All told, these six exemptions account for $3,391.5 million of the total $4,234.2 million in exemptions for 2009. That’s about 80%.

So $4.2 billion has shrunk to $842.7 million. That’s still a lot of money, but not near as much as spending advocates would like to have Kansans believe is lying in wait just for the taking.

5 Comments

  • You are good, Bob!! BUT, I guarantee you they’ll refute everything you’ve said here, and once again, we’ll be at an impasse on the subject of funding for K-12. It’s just a fact that liberals do not understand cause and effect, which you have so brilliantly explained here. It’s all about taxing citizens until the schools have what they deem to be adequate funds. It seems these “for the children” zealots will only be happy when they’ve driven all vestiges of wealth out of this state. California, here we come!!!

  • The Eagle’s editorial staff over the yeas has always railed about sales tax exemptions and the need to eliminate them. A point of interest is the fact that newspaper advertising is currently exempt from sales tax. I wonder what the Eagle management would think if they were required to pay sales tax on advertisements placed in their newspaper? And while I am picking on our newspaper friends, perhaps they would support an environmental landfill impact fee on newsprint by asking the state legislature to levy a $0.50 cent deposit on each newspaper sold as a means of encouraging newsprint recycling. In addition to delivering he newspapers, the newspaper publisher would be required to pick-up the individual newspapers and issue the $0.50 cent credit to their subscribers. The next time our newspaper advocates putting trash haulers out of business via mandatory franchising, perhaps we need to advocate this recycling fee for newspapers with our legislators. And since larger companies are always in a better position to handle additional taxes and regulation, the $0.50 cent recycling fee could be limited to newspapers with daily circulations exceeding 50 thousand copies.

  • Craig Gabel -

    John I think it would sound like a stuck hog if that newspaper fee was ever introduced.

  • Craig Gabel -

    Bob I am sorry but on this one I must respectfully disagree with you. Consider the size of the State budget, and the size of these exemptions, if these items were not tax exempt then the Ks. sales tax could be cut by 1/2 or more. Which would make it much less of a burden for everyone including these businesses. In addition producers would quickly find a way to take a product from raw form to finished product with many less taxable steps, thus promoting productivity, and creating a business model that would compete much better in the global economy.

  • I think I am in agreement with you here, Craig, although I didn’t expound on this in my article. The big-spending advocates want to eliminate sales tax exemptions so that the state would get more revenue. I favor eliminating exemptions so that tax policy is more consistent and fair. Then, like you suggest, cut the sales tax rate.

    And thank you, Kim, for your complements. I fear you are correct in your assessment of the situation.

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