OPINION: How The Governor Can Lower Taxes

Dennis Lauver - Wed 07:53 AM 01/09/2013

Dennis Lauver is President & CEO of the Salina Area Chamber of Commerce. He has worked for chambers of commerce in Iowa, Nebraska and Kansas. He became President/CEO of the Salina Area Chamber of Commerce in late 2006.

Governor Brownback is to be applauded to his laser sharp focus on creating a better business climate in Kansas. The 2012 tax changes to help small business owners were a positive step forward. More needs to be done. Here are some thoughts as this is debated in 2013:

1. It’s more complicated than “Low Tax Rate = More Jobs”

The New York Times published a searchable database of 150,000 business incentives given by state and local governments to attract growth. They compared the size of these incentives to the size of state budgets and on a per capita basis.

State and local governments in Texas must spend 51 cents per state budget dollar in incentives to create growth. This is $759 per resident. No other state even comes close. This statistic proves that there is more to trigger growth than a low tax rate.

Washington has no state income tax but governments there must use 15 cents of every dollar of its state budget ($349 per resident) in incentives to attract growth. Next door Oregon has an opposite approach to taxes. Governments in this high income tax state need to use 12 cents per dollar of state budget ($226 per resident) as incentives to attract growth.

Iowa and Kansas are two similar states with agriculture and manufacturing economies. Kansas has the lower tax rate and government incentives are 17 cents per dollar of the state budget ($355 per person) compared to Iowa, which has a higher corporate tax rate. Iowa needs only 4 cents per dollar of state budget $73 per capita to attract growth. Minnesota has a high corporate income tax rate but only uses needs a single penny per dollar of state budget to attract jobs. Minnesota has higher tax rate than neighboring South Dakota yet has grown at triple the rate since 1980.

How can it be that a low tax rate doesn’t guarantee job creation? Here is why:

2. Tax policy should encourage manufacturers to locate in Kansas

Business decision makers listen to their accountants who don’t focus on the tax rate and instead focus on what income is taxed. Iowa has a higher tax rate than Kansas but identical manufacturers would pay 227 percent less in income taxes there than in Kansas in 2012. This is because of something called the “single factor sales” formula. Companies can be taxed, to varying degrees, on three fronts: property, payroll and sales. Kansas considers all three of these when calculating taxable income. Only nine percent of Americans live in states with the approach used by Kansas. Fast growing states only tax corporations on their in-state sales. Fast growing states have removed the disincentive to have property and payroll in a state. These are the states that are attracting high wage American manufacturing jobs.

The 2012 tax changes dipped the toe of Kansas into single factor sales formula. The State of Kansas should not be timid in regards to this and should take this approach for all corporations because this is the single easiest way to build a tax climate that will help create jobs and get people to move into Kansas.

On December 17 2012, Oregon’s Governor signed into law a bill that guarantees Nike up to thirty years of single factor sales. This was so important that Oregon had a special session of the legislature to approve the bill. Before Nike would expand and create 500 jobs (their current Oregon employees average $100,000 annual salary) and make a $150,000,000 investment, they wanted tax certainty. Not that the certainty wasn’t about the rate; it is about the rate is applied, an important aspect that is not calculated in documents like the “Rich States, Poor States” report. Dr. Laffer told The Salina Journal that my 2012 criticism of the report was valid when I complained that it uses too broad a brush to compare state tax policies. It isn’t about the tax rate; it is about how the tax is applied to business income.

3. We should avoid state tax policy that creates jobs in China and inflates the trade deficit

I understand the conceptual thinking of relying on sales tax to fund state government but practically speaking there is a unique challenge hereunto yet discussed. The average Kansas family is like mine: a limited percent of what we buy is made in America, let alone Kansas. When the cash register rings, we are frequently buying products made in China or some other nation instead of things made in Kansas. This creates overseas jobs instead of jobs in America. On some level, it seems a little counter-intuitive that our state tax policy should so heavily depend on something that is creating jobs overseas instead of manufacturing jobs in Kansas.

I realize that Saline County is in the middle of Kansas and our merchants won’t experience leakage to other states with a different tax rate but if was in a border county, I wonder about the impact of a sustained increase in the state sales tax.

It is property taxes that business people don’t like. “I don’t like paying property taxes because I have to pay it in good times and in bad times” is a frequent refrain. Local option sales taxes provide the resources for communities to stabilize property taxes to help support our schools and encourage the development of Kansas cities. Increasing the state sales tax will put pressure on property taxes while reducing the use of the best local tool that holds down property taxes.

I applaud the Governor’s leadership to lower taxes. Going forward, tweaks to the 2012 tax code revisions can help create Kansas jobs by focusing on what truly impacts corporate location decisions; the apportionment of corporate income taxes and avoiding high property taxes.

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