A study released Monday by the Kansas Economic Progress Council found that increasing the sales tax by one cent would produce greater economic benefits than if legislators did not enact the tax hike.

The report, written by Wichita State University economist John Wong, has been heavily publicized by the general media and used to help state legislators justify a sales tax increase. Legislators will need to cut state spending, increase taxes, or find other sources of revenue to fix the $510 million budget gap currently looming within the fiscal year 2010 and fiscal year 2011 budgets.

Art Hall, director of the University of Kansas Center for Applied Economics, pointed out that the study fails to take into consideration how Kansas residents would react to a tax increase.

“This assumes that consumers will not respond at all to an increase in prices as a result of an increase in sales tax, even though there is a mountain of evidence to suggest that consumers will respond and it won’t be positively,” Hall told Kansas Liberty.

The report, “Comparative Analysis of the Economic Impact on Kansas of a Sales Tax Increase and/or State Spending Reductions,” examined how Governor Mark Parkinson’s proposal to increase sales taxes by one cent would impact the state. A fiscal note indicates that Parkinson’s plan to increase the sales tax from 5.3 percent to 6.3 percent from July 2010 to July 2013 would yield approximately $350 million in tax revenue.

If the tax is adopted, residents could expect to pay an additional $266 per year for housing, food and transportation, the report found.

Wong found that increasing taxes, rather than cutting $350 million in state spending, would have a better economic outcome for the state, though both options resulted in a negative economic impact.

The Wong report says that if the Legislature approved the sales tax increase, the state would create $350 million in revenue, but the state would still experience a loss of about $363 million due to variables such as a decrease in property income and employee compensation.

The Wong report said that increasing the sales tax would result in a loss of 3,231 jobs across the state.

However, if the state does not enact a sales tax increase and instead made $350 million in spending cuts, then Kansas would experience a loss of $420 million in economic “output” or benefits, according to the Wong report.

The failure to increase taxes would result in a loss of 5,177 jobs across Kansas, the Wong report said.

Wong’s findings clash with Hall’s January report which also delved into how increasing the sales tax would impact the Kansas economy. The Hall report, which was provided as testimony in the House Taxation Committee, found that a one-cent increase in the sales tax would result in a loss of more than 26,000 private-sector jobs and about $2 billion in personal income over a six-year span.

Government employment would see an increase of 6,886 jobs during the same time period.

The Hall report found that the impact of increased taxes on the private sector would cause a decrease in the amount of tax revenue collected, and therefore would create less revenue for government.

“The simulated decline in private sector economic activity will reduce other taxes so as to offset by between 25 percent and 30 percent of the estimated revenue increases from increasing the sales tax rate,” Hall’s testimony says. “Local tax revenues will decline by a simulated 0.28 percent.”

While Wong’s report provides a snap shot of the impact of sales tax over a one-year period, Hall’s report looks into the impact of the increased tax would have on the economy between 2010 and 2015. Hall’s report also scrutinized the tax increase while considering the impact of human behavior.

Hall said that because of the core differences in how the studies were conducted comparing the two different reports was like “comparing apples to oranges.”

The main factor setting the two reports apart was that Wong did not take into account behavioral response, Hall said.

“This is the real world and no one believes that people are robots and Professor Wong does not either but his model does,” Hall said.

While an Associated Press report which focused on Wong’s report was picked up by the Washington Post, the Kansas Economic Progress Council’s web page makes no mention of it. The Wong study is posted on the web page for the Kansas Association of School Boards, which regularly advocates for tax hikes.

The KEPC web page also does not provide a telephone number and an attempt to reach the organization via email was not responded to.

According to the Kansas Economic Progress Council’s tax form, they had a total revenue of $47,250 in fiscal year 2008 which came entirely from contributions, gifts and grants. That year KEPC spent roughly $25,000 of the revenue on lobbying and $6,000 on public relations.

The books for the KEPC are in care of Mary Birch who is a government relations coordinator at Lathrop & Gage. Sen. John Vratil, a Republican from Leawood, who consistently advocates for tax increases, also works at Lathrop & Gage.

The tax form lists Ed DeSoignie, the executive director of the Heavy Constructors Association of Greater Kansas City, as the president of the KEPC; Patrick Hurley, a Topeka communications and public relations consultant and lobbyist, as a director and Bob Totten, public affairs director at the Kansas Contractors Association as a director.

Kent Eckles, vice president of government affairs at the Kansas Chamber of Commerce, said that it appeared as though the Kansas Economic Progress Council had produced this report to counter Hall’s findings.

“This is short-sighted, it is off the mark and it fails to recognize that the private sector funds the state,” Eckles told Kansas Liberty.

Chair of the House Commerce and Labor Committee Rep. Steve Brunk, R-Bel Aire, also said that that Wong's study failed to consider the fact that the public sector relies on revenue generated through the private sector.

“It’s the private sector that ultimately provides funding for government,” Brunk told Kansas Liberty. “Raising taxes can and will damage the economy.”

Brunk questioned how the economy could possibly be helped by adding an additional tax burden on Kansas businesses which are already facing an increase of about $163 million in unemployment insurance taxes, and increasing the burden on the approximate 6.9 percent of unemployed Kansans.

Brunk said during the upcoming budget debates he would be supporting ways to close the budget deficit that did not include increasing taxes. For example Brunk said he would be supportive of freeing up and utilizing the more than $700 million school districts currently have within emergency or contingency funds.

“There are already proposals out there that fix the budget without raising taxes,” Brunk said. “It is unnecessary to raise sales tax or to target any particular entity for a tax increase because we have other options at this time.”

Resources:

Professor Wong's report

Professor Hall’s testimony

Kansas Economic Progress Council

The Week in Review