Analysis of proposed tax changes in Kansas

Proposed changes in the Kansas motor fuel tax and sales tax on groceries affects households in different ways.

As part of a revision to the tax regime in Kansas, a bill proposes to raise the motor fuel tax and reduce the sales tax on most types of groceries. (Restaurant meals would not be affected.) The bill is HB 2237.¹ It implements most or all of the elements of a plan called “The Path Forward.”²

Excise taxes (the motor fuel tax) and sales taxes are usually regressive, meaning that their impact is felt most severely by lower-income households.³ Data shows that as income rises, so too does spending on motor fuel and food at home. But the rise in spending is not proportional to income. For example, data from BLS (see below for references) tells us that households in the lowest quintile of income spent an average of $939 per year on motor fuel and oil in 2015. For the highest quintile of households, spending was $3,226.

But when we look at this spending as a percent of household income after taxes, for the lowest quintile spending on motor fuel and oil represents 8.2 percent of income. For the highest quintile, it is 2.3 percent. A similar pattern holds for purchases of food for home consumption.

Because of this relationship, taxes on the sale of gasoline and food affect lower-income households proportionally more. What I have done is to estimate the additional cost, as a percent of after-tax income, of the proposed motor fuel tax. As can be seen in the nearby chart, the additional cost ranges from 0.39 percent of income for the lowest-income households to 0.11 percent for upper-income households. This difference, a factor of 3.5, illustrates the regressive nature of sales taxes, and the gasoline tax is just that — a sales tax.

The bill proposing the increase in gasoline tax also proposes a reduction in the food sales tax rate from 6.5 percent to five percent. That tax is also regressive. In 2014, as Wichita was considering adding one cent per dollar to the sales tax already paid, my analysis of spending found this: “The lowest income class of families experience an increase nearly four times the magnitude as do the highest income families, as a percentage of after-tax income. This is the regressive nature of sales taxes illustrated in numbers.”⁴

A nearby chart shows that the savings from the proposed lower food sales tax ranges from 0.07 percent for high-income households to 0.33 percent for low-income households. This is consistent with the regressive nature of sales taxes: They affect low-income households greatest — when raised, and also when lowered.

Another chart shows the summative effect of the higher fuel tax and lower food sales tax. Of interest, the net effect is highest for the middle 20 percent of households. Note that considering these two taxes, the effect of the proposed bill is to raise taxes for everyone.

Show the math

The Bureau of Labor Statistics, a unit of the U.S. Department of Labor,⁵ has data for household expenditures on gasoline and oil. This data is available for five intervals, or quintiles, of income.⁶

Then the U.S. Energy Information Administration, the statistical and analytical agency within the U.S. Department of Energy,⁷ has gasoline prices. It doesn’t have them for Kansas, but it does for the Midwest.⁸

From these two values, we can calculate the number of gallons of gasoline purchased for each income level. Here, we lose a bit of validity, as the BLS data is for purchases of gasoline and oil. But it’s the data we have, and purchases of gasoline surely dominate purchases of motor oil.

Once we have the number of gallons of gasoline purchased, we multiply by the proposed eleven cents per gallon additional tax. This produces the extra gasoline sales tax cost per household. This is a static calculation and assumes no change in the number of gallons purchased due to the higher cost from the tax, or from any change in gasoline prices for any reason.

Then, the BLS Consumer Expenditure Survey also holds income after taxes for the five income levels. Simple division gives us the percent of household income that the additional tax represents.

The BLS Consumer Expenditure Survey also holds data for spending on food at home for the five income levels. From that, we can multiply by 1.5 percent to estimate the amount saved if sales tax on food falls to five percent from 6.5 percent. As with purchases of gasoline, this is a static calculation and assumes no change in behavior from reduced sales tax on groceries. Simple division gives us the percent of household income that the tax savings represents.

Then, we can subtract the food sales tax savings from the additional gasoline tax costs to produce a net calculation.

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Notes