Post audit recommends tax exemption study

The Kansas Legislative Post Audit division (LPA) is recommending the Legislature formally examine roughly $6 billion in foregone annual revenue that’s lost to tax credits and exemptions. 

State revenue, and possible ways to enhance it, will be an important topic in 2018 as the Legislature grapples with a slow-growing state economy and the Kansas Supreme Court’s recent order to put additional funding into the K-12 school finance formula.  

In a report released this month, LPA says Kansas trails other states in following “best practices” for evaluating tax incentives, which are mostly mandated by the federal government, by the state constitution, or to avoid double taxation. Many tax credits or exemptions, however, are policy choices that are enacted by the Legislature to influence taxpayer behavior. The Kansas Department of Revenue administers most of the state’s tax credits and exemptions, but the Insurance Department tracks tax credits that are claimed by insurance companies. Of the $6 billion in foregone revenue, roughly $1 billion is not mandated by federal or state law and would theoretically be available to augment the state general fund. 

Tax credits and exemptions are fiercely protected by state and federal advocacy groups because they encourage taxpayers to patronize or contribute to industries or organizations. Although the amount of foregone revenue from credits and exemptions is substantial, attempts to eliminate or rein them in are typically met with strong resistance. 

LPA says that while the revenue and insurance departments have a comprehensive inventory of all tax credits and exemptions, the state doesn’t have a formal policy requiring state agencies to routinely evaluate those incentives and there is no requirement that legislators consider the results of tax incentives on the state economy. (The Department of Revenue does offer basic reports to the lawmakers, and committees receive copies of Post Audit reports on tax incentives). 

The LPA audit says several of Kansas’ neighboring states (Nebraska, Oklahoma and Iowa) meet many of the Pew Charitable Trusts’ best practices on evaluating tax credits and exemptions because they have formal policies requiring “regular, systematic evaluation of all major tax credits and exemptions, and most regularly evaluate the costs and economic impacts of tax incentives.” Colorado and Missouri are “making progress,” but Kansas is pegged as one of 23 “trailing” states. 

LPA said the Legislature should identify major credits and exemptions to regularly review and assign one or more state agencies to conduct evaluations of these incentives on a predetermined multiyear schedule; these regular evaluations should assess the impacts of incentives on the economy and taxpayer behavior compared to their costs; and the Legislature should also require appropriate legislative committees to consider evaluation results as part of their policy decisions. 

The 2018 Kansas legislative session convenes on January 8. 

 

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