In the midst of the election season, when most lawmakers are thinking about winning their elections, at least one set of lawmakers in Kansas is thinking tax reform.  A committee in the Kansas legislature is planning to begin the process of analyzing Kansas’ tax structure and formulating recommendations for future tax reform measures. 

Representative Kenny Wilk (R) is chairman of the Special Committee on Assessment and Taxation, which will conduct the study on current state and local tax structures. Representative Wilk’s committee will have many challenges to overcome; the opportunity to analyze Kansas’ tax structure and provide recommendations to enhance Kansas’ competitiveness, however, is a golden opportunity that should not be wasted. 

While Kansas’ current tax system does not rank among the nation’s worst, lawmakers are can still make significant strides toward a more competitive system. For instance, Kansas ranks 34th in the Tax Foundation's 2006 State Business Tax Climate Index (stay tuned in this column, as the Tax Foundation is set to release the 2007 State Business Tax Climate in October).

The State Business Tax Climate Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales and gross receipts taxes; unemployment insurance taxes; and taxes on wealth, including residential and commercial property. More damaging than Kansas’ mediocre ranking is the fact that Kansas’ tax system lags behind all neighboring states (with the narrow exception of Nebraska).

New reports show state tax collections are booming nationwide and Kansas is no exception. As it turns out, Kansas is collecting a windfall of tax revenue from state taxes. Figures from the U.S. Census Bureau show that Kansas’ revenues from the corporate income tax exploded to $248 million in Fiscal Year 2005. From Fiscal Years 2003 to 2005, Kansas’ inflation adjusted rate of growth in corporate tax collections exceeded 124 percent. When Kansas’ lawmakers convene in early 2007, they should consider using those surpluses to make the state tax system more competitive.

One of the easiest ways to make Kansas’ tax system more competitive is to eliminate the corporate franchise tax. The corporate franchise tax has always been one of the worst taxes from the perspective of tax competition.  Because many states don’t have one at all, it puts Kansas in an especially bad light in attempting to attract new business investment. Furthermore, it does not bring in a huge amount of revenue, so total repeal of the franchise tax should be politically possible.

While lawmakers should consider options to improve the competitiveness of the tax system, they should also be cautious of attempts to lower taxes through special credits and deductions. These often complex credits and deductions appear to help taxpayers, but in reality they are poor tax policy because many times they force the overall tax rate to increase. Therefore, everyone who does not receive the (often politically motivated) special credits or deductions will be worse off.

The heat of the campaign season will put additional pressure on our elected officials to bow to the influence of special interest groups that demand more and more government spending. However lawmakers should remember that fundamental tax reform is the key to unlocking Kansas’ potential by a climate that is hospitable for business investment. Without a friendly climate for business in Kansas, our well-educated workforce could very well leave the state on our well-funded roads to search for work elsewhere.

Hopefully, our lawmakers in Topeka will not squander this opportunity to make tangible improvements to the tax structure by simply spending the new revenue on additional government programs. Other states are continually looking at how to make their states more competitive by investing in the business tax climate for the long-term. Hopefully Representative Wilk’s Special Committee on Assessment and Taxation will provide the needed momentum to get tax reform off the ground in Kansas and begin a discourse on making Kansas’s tax structure more competitive.

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Jonathan Williams is a tax policy fellow with the Kansas-based Flint Hills Center for Public Policy.  To learn more about the Flint Hills Center and author, please visit www.flinthills.org. A bio on Mr. Williams can be found at http://www.flinthills.org/content/view/24/39/ .