Today Kansans will face an added tax burden on retail purchases, as the statewide sales tax rate goes up by one cent per dollar. Touted by its backers like Kansas Governor Mark Parkinson as a “one percent” increase in the tax, it is actually an increase of (6.3 – 5.3) / 5.3 = 18.9 percent.
In some parts of the state, the combined rate will soar to over ten percent. The City of Lawrence is considering whether to require businesses to post signs advising — or warning– shoppers of the sales tax they’ll pay in stores.
The debate over the sales tax and the harm it causes was fueled by two studies that were often viewed as competing with each other, but really didn’t. One looked at the harmful effects of the tax for just one year and concluded that while the sales tax would destroy private sector jobs, a reduction in state spending would cause even more harm. Naturally, tax and spending advocates latched on to this study.
The other looked at a longer period of time and considered actual consumer response to increased taxes. It, not surprisingly, found that the sales tax would be very harmful.
The first study, besides looking at just one year, also shows evidence of faulty thinking. This study, produced by Wichita State University professor John D. Wong, contains this paragraph in its conclusion:
Second, the revenue enhancement scenario spreads the negative effects throughout the state, both geographically and across all 2.8 million residents. The effect on any individual and on any business is minor. In contrast, the spending reduction scenario severely affects a small number of state residents and businesses — state employees and those private-sector businesses that serve state employees and state government directly. The likelihood of a business failing under this scenario is much greater than in the tax increase scenario. A business failure will have a ripple effect across the economy.
In this paragraph we can find several examples of faulty economic thinking.
For example, as Kansas consumers will now have less discretionary income and may dine at restaurants less often, it’s possible that restaurants might close. More likely, however, the restaurant manager will find he doesn’t need as many employees to serve the diminished customer base, so a waiter loses his job.
These job losses, affecting just one or two people at a time and spread across the state, won’t create a business failure, as Wong mentions. There won’t be newspaper or television stories. But for the people directly harmed, I’m sure they won’t view the effect as “minor,” as Wong writes.
And Wong may have forgotten that each lost job produces a little ripple of its own.
Furthermore, when these job losses are aggregated over the state, there will be an impact. How much? Well, the sales tax is estimated by Wong to bring in $350 million, so we can use that as an estimate of the amount of money Kansans don’t have to spend at their own direction and discretion anymore.
(Wong notes that some of the sales tax will be paid by visitors to our state. Welcome to Kansas!)
We also see in the paragraph one of the primary problems with government taxation and spending. John Stossel explains:
The Public Choice school of economics calls this the problem of concentrated benefits and dispersed costs. Individual members of relatively small interest groups stand to gain huge rewards when they lobby for government favors, but each taxpayer will pay only a tiny portion of the cost of any particular program, making opposition pointless.
In this case the special interest groups include school spending advocates and state government employees. They believed they were fighting for their jobs. School spending advocates believed they were fighting for the children, too. But we ought to step back and consider the value of some of these jobs, and whether the services provided — education, for example — couldn’t be better provided in the marketplace rather than by government.
Also, we should note that school teachers and state government employees are represented by unions that spend millions advocating for their members each year. Waiters and others who will lose their jobs one at a time don’t have such representation.
So we had the powerfully-motivated special interests on one side. Then we had Governor Parkinson telling us not to worry, that in Wichita people didn’t even notice the one cent per dollar sales tax used to pay for the Intrust Bank Arena.
When you add in newspaper editorial writers like the Wichita Eagle’s Rhonda Holman, who today wrote that “No one relished raising sales taxes right now” and praised the arena sales tax, there you have the entire argument made.
Despite Holman’s claim, many people salivated at the idea of an increased sales tax, or any other tax. The governor viewed the tax increase as his legacy.
We also need to dismiss the claims of massive cuts to the Kansas budget. Recently Kansas Senate President Stephen Morris mentioned these, writing “… very difficult decisions were made to cut or reduce the $6 billion state budget by roughly $1.5 billion …”
For most people, a cut of $1.5 billion from a $6 billion budget means the state will spend $4.5 billion. But the spending bill passed by the legislature calls for spending $5.6 billion in fiscal year 2011, which starts on July 1, 2010.
Today the Eagle’s Holman makes a similar claim, mentioning “$1 billion in recent cuts to state services.”
These “budget cut” numbers make sense only when you look at planned spending, not actual spending. Even then you have to add up these phantom cuts over a period of years to get to the claims of Parkinson, Morris, Holman and other big-government spending advocates.
As the chart shows, actual spending has declined slightly, but is projected to rise during the fiscal year that starts today.
Over the years, we see that state spending in Kansas has risen rapidly, while at the same time our population in Kansas grows very slowly.
For the sales tax and spending increases to make economic sense, you have to believe that state government can spend money more wisely than its people can. Given the special interest group fingerprints all over this budget, that’s not going to happen.
What is the future of this sales tax? It’s scheduled to decline by 0.6 cents per dollar in three years, the remaining 0.4 cents per dollar to be used for transportation. But these taxes have a habit of failing to disappear on schedule. The supplemental note for the bill that last increased Kansas sales tax contains this: “The state sales and compensating (use) tax rate would be increased from 4.9 to 5.3 percent, effective June 1, 2002. The rates would then be reduced to 5.2 percent on June 1, 2004; and to 5.0 percent on June 1, 2005.”
As of yesterday the sales tax was was still 5.3 percent. The two scheduled reductions never took place. Sometimes promises from the Legislature don’t mean very much.