Should state eliminate corporate income tax?

Written by Rep. Bob Brookens Tuesday, 08 March 2011 14:43

I need your input. The Kansas House is about to vote on a matter of seismic proportions in the near future.

We will soon vote on many pieces of tax legislation. None of them are likely to address the long list of exemptions from paying property or sales tax for this group or that entity.

The issue at hand: Should Kansas eliminate the corporate income tax? Should our corporations pay income taxes to support our system of government or should they be exempt to entice them into Kansas or because they create jobs and stimulate the economy?

Should Westar, Kansas community banks, Bank of America, Wells Fargo, Boeing, Cessna, etc., pay no income tax?

I want to hear from you, no matter your view.

The Kansas Chamber advocates its elimination, and instead that we permanently keep last year’s 1 percent sales tax increase. (The 1 percent is designed to partly sunset in 2013; last year the Kansas Chamber violently opposed its passage.)

Please don’t pick up the phone yet to call. Read the rest of this column first.

Do I believe corporate income taxes are too high? Probably. But a businessman who owns and runs a Kansas bank and pays the tax says no. He believes corporate taxes are about right, considering the whole taxing system.

Do I advocate some adjustment either now or after the recession? Yes, but not now, not with the budget hole we have.

Do I believe the corporate tax ought to be eliminated? No.

Will a lower income tax spur growth? I spoke to a bunch of corporate business owners, most from this district. A couple of them reminded me that struggling corporations have little income and pay little or no tax. Cutting the tax rate or eliminating the tax is meaningless during a recession, and this is no time to consider its elimination.

All the corporate owners I spoke to disagree with the Chamber. They all believe Kansas corporations ought to pay corporate income tax. (There are other things that need fixing.)

During my first term in office, we discussed businesses being economic engines, and we talked about creating a business-friendly tax policy and environment.

Professor Art Hall, the Koch-endowed chair of the KU Center for Applied Economics, spoke to the Republican caucus on two occasions. I think he was speaking on his own, not on behalf of the university.

While Hall and I are not always on the same page, his words rang loudly to me on this issue:

(a) If Kansas is to foster new business, it must have clear and consistent regulation and tax policy.

(b) Get out of the way of businesses so they can do their work riding into the frontier and creating capital and jobs.

(c) Most new businesses in Kansas will not be large companies lured here. The big fish are temporary and will leave when incentives run out, (Hillsboro folks, think Reynolds Aluminum!).

While some companies move in from elsewhere, most new businesses are locally grown—small businesses, the entrepreneurs among us, those who have the stomach to conceive a venture and take the risk—and policy should emphasize their needs.

(d) The most significant point to me for this article is this: It doesn’t matter whether we model our tax structure after the “fair tax” concept (a super sales tax) or the traditional three-legged stool approach, the key is the state’s tax structure must not be overly burdensome, the rules must be clear, and government must not get in the way of business formation (see (b) above).

When in the 1980s farmers were struggling, did Kansas lower their income tax? No, we modified the system that for farmers was burdensome.

For whom are we proposing to eliminate the corporate income tax? The new business? The established business making money hand over fist because of our current policies?

Well, what are the “fair tax” and “three-legged stool” as they relate to tax policy? Concep­tually, the “fair tax” is sort of a super sales tax; I’m going to focus on the three-legged stool today.

The three legs of the stool are sales tax, property tax and income tax. Each tax tends to impact one segment of people more than another tax, so when we fairly—not necessarily evenly, but fairly—balance the three taxes, no one group is unduly burdened by the tax.

Through the years, this has been the cornerstone of Kansas’ tax policy, and some argue it has served us well when we work to keep it balanced.

With the three-legged-stool system, good governance requires the three legs stay in balance and not be burdensome. I’d suggest right now they’re not balanced and are burdensome. What happens if you’re sitting on a three-legged stool and one leg is 5 inches shorter than the other two?

Here are the downsides of each tax:

(1) The sales tax causes a person with low income/low assets to pay a higher proportion of his assets for taxes than a person of high income or large assets. The tax rate may be the same but the proportion of tax to assets is quite different.

(2) A person whose business is labor-intensive but has little business property—an attorney or CPA, for example—would prefer a property tax to the income tax if she is looking solely at her self interest. A farmer who needs land and machinery to run his business would likely prefer an income tax to a property tax and likely prefers sales tax since ag-related purchases are currently tax exempt.

Get the idea? Tax policy should be, in the final analysis, as fair as we can make it for all, in my view. The key is balance.

So, should corporations pay no income tax? Why? Why not? Incidentally, the vast majority of small businesses aren’t taxed as corporations but are taxed individual income taxpayers, like non-corporations.

One other matter: I have an error to correct. Three weeks ago, I wrote that school districts in Kansas, at the urging of the Legislature through new legislation, should move whatever unused sums they had on hand into their contingency funds, and prepare for the predicted shortfalls.

I should have said that many legislators urged their school districts to take this action. I was on the Education Committee last year, and we passed a bill out to give extra authority, then the House passed the measure over to the Senate, but it never became law.

In that column, I also expressed frustration with the Kansas Center for Policy for jumping on schools for doing what the legislature had encouraged.

While school districts had no new authority, some districts took the advice of legislators and did move what was legally permissible under the old set of rules. Turns out they’ll need it.

Thanks to the Center for asking me to clarify the issue.

To give input, please call my Topeka office: 785-296-7636 or e-mail me at: bob.brookens@house.ks.gov so my assistant can tally your thoughts.