A recent editorial in one of Kansas’ leading newspapers may lead readers to believe that eliminating sales tax exemptions holds the key to solving the state’s budget problems. But following the advice of the editorial would place Kansas at a severe disadvantage to other states in manufacturing.
The Kansas City Star editorial, titled Education should trump tax breaks in Kansas, holds this paragraph: “For every penny of sales tax collected in Kansas, the state exempts 2 cents. Brownback should be looking at ways to spread, not increase, the tax burden more fairly so everyday Kansans aren’t asked to prop up breaks for businesses.”
While the numbers the editorial cites are correct, they are used in a misleading way, as we can easily see.
In 2009, the retail sales tax brought in $2,286.7 million. According to a study by the Kansas Legislative Division of Post Audit is titled Kansas Tax Revenues, Part II: Reviewing Sales Tax Exemptions, Kansas has 99 sales tax exemptions that cost the state an estimated $4.2 billion in 2009. That’s pretty close to the two-to-one ratio of exemptions to collections that the Star editorial mentions.
But if the Star had cared to look any farther, they would have realized that this number is an illusion. The audit report noted: “Six of those exemptions, accounting for $3.4 billion, relate primarily to taxing goods at the final point of sale, and not taxing government entities.”
An example of an exemption that contributes toward the $3.4 billion figure is exemption 79-3606 (m), described as “Ingredient/Component parts: Of items manufactured or produced for sale at retail.” The audit report estimates that for 2009, this exemption cost the state $2,248.1 million in lost sales tax revenue.
This exemption isn’t really an “exemption,” at least if the sales tax is thought of as a retail sales tax designed to be levied as the final tax on consumption. That’s because these goods aren’t being sold at retail. They’re sold to manufacturers who use them as inputs to products that, when finished, will be sold at retail.
An example would be an aircraft manufacturer purchasing a jet engine to be installed in an airplane that is being built. Most states don’t tax this type of sales. If Kansas decided to tax these transactions, it would place our state’s manufacturers at a severe and crippling disadvantage compared to almost all other states.
There are two other exemptions that fall in this category of inputs to to production processes, totaling an estimated $461 million in lost revenue. When we consider these numbers, the premise of the Star’s editorial — that there are untold riches to be collected if we close tax breaks — isn’t true. That is, unless the Star really believes we should be taxing these type of intermediate business transactions. I wouldn’t be surprised if it thinks we should.
I agree with the Star that we should be looking for ways to spread the tax burden. Then, let’s lower the rates.