Archive for Monday, April 19, 2010

New study says sales tax better for economy than cuts

April 19, 2010

TOPEKA — A sales tax increase would be the best choice among several bad options to fix the current budget crisis, according to a study released Monday.

“This study shows there are no easy choices, but the solution that causes the least economic damage is a revenue enhancement,” said Bernie Koch, executive director of the Kansas Economic Progress Council, which is a not-for-profit business organization that requested the study.

The analysis showed that a one-cent sales tax increase would have less of a negative impact on the economy than cutting the state budget by $350 million.

The information lands in the middle of a hotly contested debate over taxes and budget cuts. The Kansas Legislature faces an estimated $510 million shortfall when it returns for the wrap-up session that starts April 28.

Having already cut nearly $1 billion from what was once a $6.4 billion budget, Gov. Mark Parkinson, a Democrat, has proposed a temporary increase in the state sales tax from 5.3 cents per dollar to 6.3 cents per dollar, which would generate approximately $350 million.

The new study showed that $350 million more in budget cuts would result in the loss of 5,177 jobs across the state. A $350 million sales tax hike would also result in the loss of jobs -- 3,231. But if the one-cent sales tax was combined with no further budget cuts then nearly 2,000 jobs could be maintained, the study said.

The study gave several reasons why a sales tax increase would have less of a negative impact than state cuts. These include:

-- A high percentage of government spending initially stays within the state’s economy;

-- The tax increase spreads the negative effects throughout the state, while cuts would fall heaviest on a small percentage of residents, such as state employees;

-- Visitors to the state will pay a portion of the sales tax increase.

The study also showed that a sales tax increase would burden low-income households more, and that the average Kansas household would pay an additional $266 per year in sales taxes.

The study said that with the proposed one-cent state sales tax increase, Kansas would move up from 23rd to ninth in the nation in its combined state and average local sales tax rate. But the study noted that ranking could be outdated quickly because many states are considering tax increases.

The study was done by John Wong, interim director of the Center for Urban Studies, Kansas Public Finance Center at Wichita State University. He is a member of the Consensus Revenue Estimating Group, which provides revenue projections for the Legislature to follow.

Koch, with the Kansas Economic Progress Council, said the impetus for the study came after testimony by Art Hall, director of the Center for Applied Economics at the Kansas University School of Business. Hall testified that a sales tax increase would cost over 19,000 jobs statewide.

“We decided to seek a second opinion,” Koch said.

Wong said he wasn’t advising the Legislature on what to do. He said the study simply shows what might happen under different scenarios.

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