CORPORATE INCOME TAX CREDITS IN KANSAS
by Ken Daniel

David Matkin is a doctoral candidate in the K.U. Department of Public Administration. He introduced a report on February 1 in the Kansas Senate Assessment and Taxation Committee.

Matkin interviewed 16 executives from 12 corporations which claimed corporate income tax incentive credits in Kansas during the past 8 years. He also received extensive help from the Kansas Department of Revenue and the Kansas Department of Commerce, and did an extensive literature review on the subject.

Here are his key findings:

1. Corporate decisions to hire employees, increase wages, and invest in equipment are based on market factors. Only rarely are they to obtain a tax credit.

2. In many cases, especially with the Kansas HPIP tax credit, the decision to seek the credit occurs subsequent to the decision to invest or even after the investment has already been made.

3. Corporations which operate in multiple states or countries may use the proceeds of their Kansas tax credits to increase their investments elsewhere.

4. Corporations are most likely to weight tax credit effects for very large capital or labor investments, locating a new facility in Kansas, or when the tax credit helps them become a low cost provider in a highly competitive market.

5. Compliance costs are a consideration. Corporations seek out and use credits with low compliance costs in states where they have a high tax liability. If taxes in a given state are low or nonexistent, it doesn't pay to seek tax credits.

(KD comment.)  I've got to say that I don't disagree with much of anything in those five key findings. However, he makes some statements in his "policy discussion" section at the end of the report that deserve comment.

"Corporate income tax credits are not likely to stimulate companies in Kansas to hire employees, increase their wages, and/or invest in additional capital."

(KD comment.)  That statement is simply wrong in the case of companies that operate entirely in Kansas. Almost all small businesses operate in only one state.

"The policy question is this: If tax credits have an indirect and positive effect on economic development, how do you keep those benefits in Kansas?"

(KD comment.)  My answer is that you give those credits to companies that operate only in Kansas, or give them only for real estate improvement investments, or make sure the credits go to small companies instead of 95% to the largest companies, as is the case now.

"Less sophisticated and financially distressed corporations are likely to be at a disadvantage to larger corporations in obtain credits with high compliance costs."

(K.D. commment.)  My answer is that you make them simple, such as Senator Jim Barnett's investment tax credit.

"Tax credits that are likely to have a lasting effect on the Kansas economy are those that are best able to keep the benefits in Kansas."

(KD comment.)  My comment is the best way to do that is to concentrate the credits on small businesses, especially on their investments in real estate improvements.