The Budget Blog

If the income tax goes to zero, how does the state raise money?

In his State of the State address in January, Gov. Sam Brownback announced that Kansas was on a path to a zero income tax. As policymakers debate whether to support the governor’s proposed direction, they should give serious consideration to the question: If state policymakers eliminate the income tax, how will Kansas fund its government? The elimination of a major tax may help produce economic growth or new jobs, but how will that growth translate into adequate funding to pay for key government services?

The chart below shows the current sources of State General Fund (SGF) revenue, which totals $6.2 billion.

State General Fund Expenses, FY2011-2018

Almost half of SGF comes from the individual income tax. If the $2.8 billion received from individual income tax goes to zero, how will that revenue be replaced? Consider four options:

Option 1: Replace with a sales tax. To make up for the loss of income tax revenue, sales tax receipts must more than double. For that to happen, Kansans must buy more than twice the amount they currently purchase, the sales tax rate must more than double, or the sales tax must be applied to many more things, such as professional services, pharmaceuticals and farm machinery. Even if every penny of the $2.8 billion Kansans now remit for the income tax were instead spent to purchase something subject to the Kansas sales tax, that would only raise $176 million in new sales tax receipts.

Option 2: Let property tax cover the bills. Kansas currently collects a 20-mill statewide levy for schools that raises about $560 million. Although the proceeds from this tax do not pass through the state treasury or the SGF but stay with the local school district, another 100 mills statewide on top of the 20 would about cover the loss of the income tax.

Option 3: Use oil and natural gas tax revenues. A number of no-income-tax states — Texas, Wyoming, Alaska — use this option, but it’s not realistic here. Kansas already collects a severance tax on oil and natural gas that raises a bit more than $100 million, but even doubling or tripling the severance tax would not begin to replace the lost income tax revenue.

Option 4: Do not replace the tax; cut spending instead. Kansas spends more than 89 percent of SGF revenue on education and human services: 50.0 percent on the public school finance formula, 12.3 percent on higher education, 19.5 percent on the state share of Medicaid and 7.3 percent on other human services and state hospitals. A decision to not replace the income tax revenue would dramatically lower education and human service budgets.

The governor and other supporters of a zero income tax have not identified how income tax receipts might be replaced other than to suggest that economic growth will somehow take care of it. Even if growth does occur, some kind of mechanism must be in place to collect income for the SGF. How will it work? What tax will be used to collect revenue? Answers to these questions must be outlined in some detail if policymakers are to make a realistic decision about adopting a zero income tax policy.

—Duane Goossen, KHI's Vice President for Fiscal and Health Policy, served as state budget director for 12 years in the administrations of three governors — Republican Bill Graves and Democrats Kathleen Sebelius and Mark Parkinson. He also served in the Kansas House of Representatives from 1983 to 1997.


TimHjersted (Tim Hjersted)March 24, 2013 at 10:07 p.m.

May I suggest a land tax?

This film explains the benefits of a land tax:

"Georgists argue that a tax on land value is economically efficient, fair, and equitable; and that it can generate sufficient revenue so that other taxes (e.g. taxes on profits, sales or income), which are less fair and efficient, can be reduced or eliminated. A tax on land value has been described by many as a progressive tax, since it would be paid primarily by the wealthy, and would reduce economic inequality."