One of the ways that Kansas might increase revenue this year is to reduce or eliminate the many sales tax exemptions that our state has issued over the years. The governor didn’t mention this in his state of the state address, but this reform would be a good thing to do, even if we’re not in a tight budget year with legislators desperately looking for revenue or savings.
The Tax Foundation provides some principles of sound tax policy. The many exemptions in Kansas don’t conform to several of these principles, as follows:
First, a tax policy should be simple with low administrative costs. Each tax exemption creates administrative work. Have you ever stood in line at the grocery store behind someone buying groceries for a tax-exempt organization? The paperwork seems complex and takes time to complete. I’ve been tempted to offer to pay the sales tax just to get the line moving.
Then, there’s transparency. According to the Tax Foundation: “Tax legislation should be based on sound legislative procedures and careful analysis.” When combined with the principal of neutrality (“The primary purpose of taxes is to raise needed revenue, not to micromanage the economy”), Kansas tax policy is lacking. For example, there are many “named” exemptions, meaning that an organization is granted an exemption crafted specifically for its benefit.
For example, there is this exemption: “3606 (vvv) Property and services purchased by Jazz in the Woods and sales made by or on behalf of such organization.” This benefits a charitable project of the Overland Park South Rotary Club. The Kansas Advisory Council on Intergovernmental Relations (KACIR) has recommended this policy: “Repeal all exemptions granted ‘by name’ to a specific organization. Either replace it with an exemption for all organizations similarly situated, or revoke the exemption.”
While this recommendation would increase simplicity and transparency, it would not do much to conform to another principle: broad bases and low rate. “As a corollary to the principle of neutrality, lawmakers should avoid enacting targeted deductions, credits and exclusions.” While charitable activity is noble, there’s no real reason why it should have a favored tax status. Someone has to decide which charities deserve the special status, which leads to problems. While paying tax means a charity will have less money to spend on its mission, a compensating factor is that if tax rates were lower, people would have more money to donate.
Most of the advocates of exemption elimination hope to raise more money for government to spend. We ought to simplify this part of our tax code for reasons of good government, whether it raises more tax revenue or not.