There’s been a lot of buzz on social media lately about replacing the Kansas property tax with extra sales tax revenue, and while it’s an idea worth exploring, it cannot be accomplished in a single legislative session for several reasons.
Senator Mike Murphy recently introduced legislation to start a conversation about replacing property taxes with a 7.6% sales tax on purchases under $20 and a flat $1.60 fee on transactions over $20. Unfortunately, the Department of Revenue doesn’t collect transaction-level data, so there is no way to determine whether that approach would generate the nearly $7 billion needed to eliminate the property tax.
A law passed last year stopped the State from collecting property tax revenue to fund state operations, so the transactional data must at least be available at the county, city, township, school district, and community college levels, if not for each of the roughly 4,000 taxing authorities. Gathering and parsing transactional data at such a granular level is no small task.
The school funding formula would also have to be revised in multiple ways to account for the loss of property tax revenue. Schools get property tax from the mandatory 20 mills required by the state. They also collect property tax for their Local Option Budgets, debt repayment, capital outlay, and a few other purposes.
Public input on replacing property tax
While transaction-level data is being collected, legislators should seek input from taxpayers and local government officials on options for collecting new sales tax revenue and how it would be distributed.
There are at least six options to generate a new sales tax:
- Senator Murphy’s combination of an add-on percentage up to a certain purchase amount and a flat fee thereafter.
- Increase the state or local sales tax on all purchases.
- Add a flat fee on each transaction regardless of the purchase amount.
- Eliminate some or all sales tax exemptions.
- Some combination of options one through four.
- Establish a separate surcharge for each county to offset the total property taxes collected in each county.
Input from taxpayers and local governments on how to distribute the new sales tax revenue is also important.
Senator Murphy’s plan calls for the state to collect and distribute the revenue on a pro rata basis, allocating 48% to schools, 35% to other local government entities, 12% to the state general fund, and 5% to a reserve fund to make up shortfalls to local governments or taxpayer rebates. This particular allocation doesn’t work because the actual distribution is 45% going to education (school districts, community colleges, etc.) and 55% to other local government entities. (As mentioned earlier, state operations are no longer funded by property taxes.)
Still, some form of pro rata distribution could be used. One method is to distribute revenue on a countywide basis, with each taxing authority’s share based on its share of the county’s total property tax. However, that could lead to some governments receiving too much revenue and others being shorted, depending on how revenue is generated.
Alternatively, the distribution could be based on each entity’s statewide pro rata share
Modeling to predict behavior changes and economic impact
Legislators also need considerable economic research to inform their decisions.
A December 2023 paper co-authored by Kansas Policy Institute and the Economic Research Center at The Buckeye Institute notes that some taxes have different effects on economic activity. The property tax may be the most hated tax, but it cannot be avoided because the county knows that your property exists. However, sales tax avoidance is common.
Residents in border counties will cross state lines to avoid the additional tax on some purchases, so allowances must be made for the resulting revenue loss in each county. Allowing the surcharge to vary by county helps avoid shortfalls and excesses, but it also creates incentives for intrastate border crossings.
Economists must also consider how much a higher sales tax may curtail current purchasing decisions.
As much as some of us would love to see the property tax go away, taking the time to ensure it can be done with minimal unintended consequences is critical.
Legislators may want to consider a pilot program to eliminate one property tax type, such as motor vehicle taxes, to test how the various assumptions play out and make adjustments before eliminating the property tax entirely.
It’s an absolute certainty that some assumptions will go awry, even those based on extensive research. Rushing to eliminate the property tax increases the odds that those variances would have catastrophic consequences.
Senator Murphy deserves considerable credit for starting the conversation. Now we need to take the time to get this right.
