Kansas Business Costs and Taxes: A Comparison with Other States, 1994 Update

Abstract

Over the last several years, Kansas, Inc. has funded several studies of business taxes and costs in Kansas. The previous studies have focused most of their attention on a single cost, business taxation. These studies have examined the Kansas tax structure in a regional and national context. They have in part satisfied a need for a compendium of up-to-date information for Kansas policy makers and community leaders.

Concerns about business taxes are rooted in the idea that Kansas must offer a sufficiently attractive business climate in order to increase jobs and income, and to ensure a high standard of living in the 1990s. It must be emphasized that the business climate in a state depends on the wages and productivity of its labor, its proximity to major markets, the strength of its educational system, the quality of life in its communities, and a multitude of factors in addition to taxation. But business taxes remain central to the discussion because, unlike many basic cost and quality of life factors, they fall under the direct control of state and local decision makers and can be changed relatively rapidly.

The current report updates information on basic business costs and taxation in Kansas and the surrounding region of Colorado, Iowa, Missouri, Nebraska, and Oklahoma. In addition, the study adds four states to the comparisons: California, Illinois, New Jersey, and New York.

The report is organized into two main sections. Part 1 (Chapters 1-9) is primarily descriptive. It retains much of the emphasis on business taxation of the earlier work. This section presents a historical overview, and then turns to a detailed comparison of specific taxes on income, property, sales, and labor. In this section, we consider the basic tax rate structures of the states and identify the numerous tax incentives available to new and expanding businesses. We also examine differences in basic business costs related to labor, energy, and land prices.

Part 2 (Chapters 10-11) provides analytical results based on a simulation model of business costs developed by IPPBR as part of its work with Kansas, Inc. The model uses as inputs the descriptive information on taxes and costs gathered during the first stage of the research. In short, the model then summarizes the impact of state tax structures and basic business costs on the bottom lines of typical firms. The estimates provided by the simulation model place interstate tax differentials in the context of overall cost differentials.

Without the aid of such a simulation model, it is often difficult to foresee how the combined state and local tax situation will affect firms operating in various industries. One complexity is that industries differ in their usage of resources. For example, the impact of the property tax is directly related to the capital-intensity of an industry. A second complexity is that federal, state, and local taxes interact with each other, so that taxes paid at one level become deductions at another. A third complexity involves the effect of tax incentives. States differ in the industries at which they target incentives, the timing of incentives, and the extent to which incentives target investment versus employment. Overall, the tax-competitiveness of a state is best gauged by a model that properly weights the impact of various taxes and incentives.