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Study: Kansas Tax Reform to Hurt Low-Income Residents

June 4, 2013
Personal Finance
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The Kansas State Legislature just passed sweeping tax reform that will overhaul the income tax and curtail a scheduled drop in the sales tax. As a result, most of Kansas will see their tax bill decrease – with one important exception: the poorest in the state, who make, on average, just over $10,000 a year.

Key findings:

  • The wealthy benefit from the tax bill; the poor will be hurt: The top 1%, who earns over $1 million a year, will see their tax bill go down by $10,038. Meanwhile, the poorest Kansans, who, on average, earn just $10k a year, will see their tax bill go up.
  • Politicians have misrepresented this recently-passed bill as a tax hike for all. This simply isn’t true – most will in fact see a substantial decrease in taxes.

Perhaps what’s most disturbing about this bill is that it’s part of a larger trend. A close Kansas neighbor, Missouri, has moved in the same direction: cutting taxes for all but the poorest in the state.

For more detail on how the people of Kansas will be affected, as well as how politicians are spinning this bill, read on below.

Overview: Who’s hurt and who’s helped by the Tax Reform

For months, the Kansas State Legislature has warred over tax reform. And their struggle has centered on where to cut more: the income tax or sales tax – more on why that’s important below, in our “Context” section.

We ended up with cuts to both, but tax relief is far more heavily weighted on the income tax, a change that disproportionally benefits higher-income Kansans – again, more on that in our “Context” section, below.

In sum, we’re left the following changes for the people of Kansas, effective 2017 (Note: in the table, we break the people of Kansas into percentiles, from the bottom 20% of earners to the top 1%):

Bottom 20% 21-40th 41-60th 61-80th 81-95th 96-99th Top 1%
Average Income $10,300 $28,000 $45,500 $71,200 $115,100 $233,300 $1,025,300
Change in Tax Burden +$18 -$116 -$269 -$629 -$1,220 -$2,699 -$10,039

Some politicians have suggested quite the opposite of what our table demonstrates, a tax cut for most of Kansas; they’ve insisted that this tax bill is a tax hike, and among their evidence is reform to itemized deductions on state tax returns.

Their logic, however, is unsound.

Itemized deductions for most higher-income Kansas citizens will in fact go up – they’ll be able to deduct more from their state returns. This change, coupled with significantly lower rates, listed below in our “Reference” section, will cut the state income-tax bill substantially for higher-income Kansans.

What the Politicians have said

  • False: Politicians have stated that tax collection is sky-rocketing, by $777 million, all because of House Bill 2059.
  • True: Under House Bill 2059, over the next 5 years, the collective tax bill for Kansans will go down, by $591 million.
  • Why the discrepancy? Originally, tax revenue was to go down far more, by $1.5 billion, and the State decided to curtail that decrease. Hence that $777 million figure, the so-called “tax hike” which politicians have used and abused to lambast their opponents.

House Representative Julie Menghini told the Kansas City Star, “It’s going to be characterized as a $777 million tax increase because it is a $777 million tax increase. Make no mistake about that.”

Yet as we point out above, Menghini’s rhetoric is inflammatory and distortionary. If you crunch the numbers, you’ll see that HB 2059 reduces Kansans’ current tax bill by over $590 million. This is a much different narrative than the one that some politicians project.

This aggregate picture of Kansas still isn’t the right story to tell anyway, because it fails to highlight changes to the tax bill of one particular income group: the bottom 20%, who will actually see their tax bill go up as the rest of the state sees tax relief.

Context: Why the Sales Tax hits the Poor harder than most

On each dollar, everyone is taxed the same. But, as a proportion of income, the sales tax takes more from the poor.

Why? The poor, by and large, contribute a significantly higher proportion of their income to sales-taxable goods. That low-income group we highlight, the bottom 20%, who earn around $10,000 a year, spend close to 90 percent of their income on sales-taxable goods. It follows, then, that they’re hit especially hard by an increase in the sales tax.

Context: Why a small increase in taxes for the Poor is a big difference for the economy

The bottom quintile will pay just $18 more because of House Bill 2059. While that number may be small, it’s still significant because:

1) This low-income group is the only group that is hurt by the tax reform. And, unfortunately, this has been a trend: a recent bill in Missouri had the same effect on the poorest in the state.  Tax reform in Kansas is symptomatic of something bigger: widening income inequality.

2) This group spends more of their cash than higher-income individuals – and higher spending means a stronger economy. For every extra dollar in their pockets, the poorest Americans, the bottom 10%, spend about 82 cents. That’s nearly double the figure for higher-income individuals, the top 10% of earners, who spend about 47 cents of every extra dollar. In other words: a higher tax on low-income folks contracts consumer spending at a much higher rate than it does for top earners.

Reference: a Summary of HB 2059

  • The Sales Tax
    • The sales & use tax will fall from 6.3% to 6.15%.
    • This may seem like a victory for low-income Kansans, who are most vulnerable to a sales tax, but it’s not: the sales-tax rate was originally scheduled to drop to 5.7% in July.
  • The Income Tax
    • The marginal rates for the state income tax will fall gradually. By 2017, the bottom bracket will be reduced from 3% to 2.3% and the top bracket will be reduced from 4.9% to 3.5%
    • A phase-out on itemized deductions revamps how Kansas treats its deductions. Originally, it simply took your federal itemized deductions less state income taxes (you can deduct state income taxes from your federal return). Soon, Kansans will be under a new system, which simply takes the whole sum of federal deductions and halves it.
    • The only exception is the deduction for charitable contributions – you’ll still be able to deduct the full amount.
    • The standard deduction will take a hit, too. For Married Couples Filing Jointly, it’ll drop from $9,000 to $7,500.
  • Further changes to the tax code are listed on the Kansas State Legislature’s website.

Methodology

NerdWallet analyzed the effect of HB 2059 with data courtesy of the Institute on Taxation and Economic Policy, the Tax Policy Center and the Urban Institute.