Food sales tax cut bill misses governor's Kansas Day deadline. What's the holdup?

It's Kansas Day, and state lawmakers failed to meet the governor's goal deadline for axing food sales tax. Meanwhile, leading legislators on the issue are hopeful they can work a clean bill next month.

"Every day we delay action costs working families money," Gov. Laura Kelly said in a statement. "Completely eliminating the state’s tax on food has resounding support from both sides of the aisle. I’m confident the legislature can get a clean bill to my desk — and done soon. We owe it to Kansans."

Kelly, a Democrat, had called during her State of the State address for the Republican-controlled Legislature to send her a bill eliminating the grocery tax by Kansas Day, which is Saturday.

"The only obstacle that could block this legislation is the same type of toxic political games that have poisoned Washington D.C., where denying a political opponent a win has become more important than getting things done for the people they represent," Kelly said in the speech.

She reiterated the self-imposed deadline to "axe the food tax" in a Tuesday tweet about an hour before the House Taxation Committee held hearings on two bills that would cut the food sales tax.

Rep. Adam Smith, R-Weskan, said not meeting the Kansas Day deadline isn't political.

"Unless you want to call spending money the political reason, I mean, that's really the hang-up," said Smith, who is chair of the tax committee. "If this didn't have such a large fiscal note, it would probably be moving a lot faster."

"We're looking at $500 million here," he said. "I just want to make sure we're giving everything due diligence and we understand exactly where all this money is going and what the benefit could be."

Invoking the failed Brownback era tax experiment, Smith expressed concern the lost revenue from eliminating the tax on food may make budgeting more difficult years from now.

"I hate to say this, but you know, 10 years ago, in 2012, we made some pretty aggressive tax cuts, and it got us in trouble," he said. "And I don't want the state to go back down that road. So I just want to be cautious."

Kansas has a large budget surplus, projected to be over $3.7 billion by the end of 2023. Legislators can afford to cut the food sales tax, but differing priorities can divide lawmakers over how to spend — or whether to spend — the windfall of taxpayer money.

More: Kansas lawmakers eye legal limit on government spending growth with bumper year of tax surplus

Backed by the governor, House Democrats introduced a bill with 44 co-sponsors, including a handful of Republicans. Meanwhile, Rep. Ken Corbet, R-Topeka, introduced a competing bill. The Senate Assessment and Taxation has hearings on the issue scheduled for Tuesday.

The House tax committee has not scheduled a time to work the bills after Tuesday's hearing.

"It's all going to boil down now to what leadership in the House wants to do, and when they want to — if they want to — work what bill and when," said Rep. Jim Gartner, D-Topeka and the ranking minority member of the committee.

Smith said testimony from that hearing will prompt behind-the-scenes negotiations to find compromises to address concerns.

"The bill as it stands right now, if we work that, it's not going to go," he said. "We heard a lot of stuff in neutral testimony that made some good points. So we are trying to figure out what we want to work on to put into the bill as an amendment."

Missed Kansas Day deadline

The first month of the legislative session is not typically known for expediency. The only bills to pass the Legislature were fast-tracked bipartisan COVID-19 staffing emergency provisions and the Republican-drawn congressional redistricting maps.

Even a bipartisan proposal to help farmers and ranchers affected by December wildfires has yet to pass both chambers.

More: Could Kansas farmers and ranchers get a permanent fence tax cut through wildfire relief bills?

"If they wanted to do it, we can have that passed in a week," Gartner said. "We could have done it by Kansas Day."

Smith said the governor's Kansas Day deadline was "pretty aggressive," but wasn't necessarily impossible for lawmakers. Regardless, he wants to move "fairly quick" in order to give retailers the time to change their point of sale systems.

"Within the next month, I think is very reasonable," Smith said.

Gartner doesn't believe that missing the Kansas Day deadline will hurt the bill's momentum.

"In fact, I think it maybe helps a little bit," he said. "I think It gives more time for constituent Kansans out there to contact their legislators."

Democrats have called for a "clean" bill that doesn't bundle their proposal with any other tax cuts.

"My wishes are that we keep it separate (from other tax policy issues) and we move it through on a timely basis," Gartner said "My gut is telling me, if we make any progress, this bill's going to get hung up towards the end of the session and inserted in a conference committee report with a number of other tax issues."

Smith said the tax committee is still looking at food sales tax only.

"There's no other income tax or property tax or anything else that's going to be thrown into it," he said. "That's not my anticipation at all."

Both leading candidates for Kansas governor support the tax cut

This session coincides with an election year, and both leading candidates have supported such a cut.

Kelly has been more involved in the policymaking but placed limited public pressure on lawmakers to meet her deadline. She said every day of delay costs families, but Kansans wouldn't see any change on their grocery store receipt for months.

Attorney general and leading Republican gubernatorial candidate Derek Schmidt has taken a hands-off approach.

In written testimony, Schmidt said he backed "significantly reducing or eliminating the state sales tax on groceries," but took no position on the bills. He wrote to lawmakers that he wanted "to help you thoughtfully work through some of the important details," but ultimately raised policy questions without answering them.

More: Food sales tax should be cut to help Kansans amid grocery inflation, AG Derek Schmidt tells GOP lawmakers

"It's going to be all politics, basically," Gartner said of the process.

He said the Jan. 1, 2023, start date in Corbet's bill indicates that Republicans "want to wait, make sure, hopefully, that Derek Schmidt is elected."

"Why is that?" he said. "Why wouldn't you want to give relief as soon as possible to Kansans?"

Smith is amenable to a July 1 start date, and Corbet said he is also OK with the date proposed by Democrats.

"I'm not so much who gets the credit as long as people get the break," Corbet said.

Smith said there wasn't any specific neutral testimony that he wanted to prioritize when drafting amendments.

"It was kind of the overall thought process on targeting this more towards the lower income families that need it," he said. "And so we're trying to figure out a way to do that, because right now you cut it out on everybody. There were some very good points made that perhaps not everybody really needs this, so are we really spending money fiscally and losing that sales tax revenue, are we spending that money wisely?"

One potential area of negotiation is the existing income tax credit. Both plans would eliminate it as part of zeroing out the sales tax.

Smith suggested keeping a version of the program and changing it to a refund instead of a credit to make it "very targeted toward children and families, retired individuals, fixed income people." He said such a proposal would be mixed with a sales tax cut and would not replace it.

What's in the two food sales tax bills?

In her State of the State address, Kelly told lawmakers the essence of the bill could be summed up in 13 words.

"Let's not overcomplicate this," she said.

Even with a fairly straight-forward bill, the policy complexities take time. The bill her party introduced, HB 2487, is 62 pages long.

It has some key differences with Corbet's bill, HB 2484.

• The Democrat plan has the tax relief starting July 1. The Corbet plan waits until Jan. 1, 2023.

• Democrats want the tax relief to apply to farmers markets, but not to restaurants or other prepared food. The Corbet plan takes the opposite approach.

• The state highway fund receives a significant portion of its money from sales taxes and could lose millions with a tax cut. The Democrat plan includes provisions that would ensure the fund is not harmed, while the Corbet plan does not.

"Kansans are basically taxed to death," Corbet said, indicating that taxes are impeding growth while contributing to outward migration.

Gartner said having two bills that try to achieve the same thing through different routes is good for policy debates. But he suggested the revenue lost in Corbet's bill from taxing restaurant food could be better used, such as on property tax relief.

"I just hope that when the dust settles that the constituents" get a tax cut, Corbet said. "If I'm you and you're a constituent and we're somewhere and every time I take a bite, say thank you because we did that for you. We gave you back a tax that we shouldn't have on you."

Both bills take the state's tax rate to zero percent on food, which is different than exempting it. An exemption would mean cities and counties would be barred from taxing food, eliminating a substantial source of revenue to local governments.

The Kansas Association of Counties supports the plan to leave local sales taxes unaffected. Deputy director Jay Hall said eliminating that source of revenue would shift a greater burden onto local property taxes.

Under the Democrat plan, farmers market food would be exempted from both state and local sales tax.

Adam Proffitt, the governor's budget director, wrote that local governments along state borders could see local sales tax revenues increase if shopping habits change.

Fiscal notes indicate the state highway fund would lose about $126 million in fiscal year 2024 without changing funding formulas.

Officials estimate that 15% of all sales tax collections come from food, with another 9% from restaurants. The Democrat plan would cut tax revenues by about $482 million in fiscal year 2024. The Corbet plan would cost about $772 million.

Both plans call for eliminating an income tax credit on food sales, which would save the state about $10.3 million a year.

Washburn University could stand to lose between $3 million and $4 million a year under the bills. The municipal university has statutory authority to levy a sales tax of up to 0.65% within Shawnee County. President Jerry Farley asked lawmakers to add a provision that would allow the university to continue taxing food.

Lawmakers could seek to change various food definitions. Under both bills, candy and soda would be considered food while tobacco and alcohol would not.

The Kansas Chamber, on behalf of candy maker Mars Inc., requested another look at the candy definition. As currently drafted, a Twix bar would not be considered candy because it contains flour, but M&Ms would be.

Would cutting taxes help food insecurity in Kansas?

Donna Ginther, economics professor and director of the Institute for Policy and Social Research at the University of Kansas, wrote that research has found that when states decreased their grocery sales tax, it resulted in a 39% reduction in food insecurity.

Kansas is one of 13 states that has a sales tax on food, and Kansas has the second-highest rate. Both Colorado and Nebraska have no tax on food, while Missouri's is 1.23% and Oklahoma's is 4.5%.

More: Gov. Laura Kelly says cutting Kansas food tax could save Kansas families $500 a year

Haley Kottler, of the Kansas Appleseed Center for Law and Justice, raised concerns of food insecurity.

"A zero percent food sales tax will not solve hunger in Kansas, but it will help fill that gap," she said.

AARP backs the idea.

"There are 65,000 Kansans 50 years and older who were food insecure in 2020, and our state's existing tax on food likely just exacerbates that insecurity," said Glenda DuBois, the AARP state director.

Lobbyist Scott Schneider noted that Supplemental Nutrition Assistance Program benefits, also known as food stamps, are not taxed. He represents the Kansas Restaurant and Hospitality Association.

"The 231,000 Kansans who participate in the SNAP program, if you take them out of the equation, the progressivity that many advocates of reducing the food sales tax are looking for goes away," he said. "The benefit actually goes to the wealthier people who buy more food, more expensive food."

Jon McCormick, president and CEO of the Retail Grocers Association of Kansas and Missouri, disagreed.

"You can't assume that families that use SNAP buy 100% of their groceries with SNAP," he said.

Lower income families pay a higher share of their income on necessities, such as groceries, Kottler said. Those receiving SNAP benefits still feel the cost of taxes because those programs are intended to supplement food budgets, not cover the full grocery bill.

How could the tax cut impact grocery stores, restaurants in Kansas?

McCormick, of the grocers association, backs the tax cut. He said grocers in rural Kansas towns, especially near Nebraska, lose sales and struggle to stay open.

"Any Kansan that's within a reasonable drive of the border is going across the state line to save money," McCormick said. "I'm pretty convinced that the sales tax issue has been a contributing factor to driving stores out of business there. Towns with two or three stores now have one or none."

"This is one of the reasons I got out of the grocery business," said Rep. Dave Baker, R-Council Grove, "because I couldn't compete, when the state government comes in and picks winners and losers."

That's partly why Corbet supports cutting the sales tax on restaurants.

"It would be nice if Kansas would one time have the advantage over some neighboring state," he said.

The Kansas Restaurant and Hospitality Association supports the Corbet plan because it "treats all food the same, whether you buy it in a grocery store or buy it in a restaurant," Schneider said.

The Democrat plan would "put our restaurants at a competitive disadvantage," he said.

Lobbyist Eric Stafford said the Kansas Chamber won't stand in the way of the proposal, but said the business association would prefer lowering the overall sales tax rate. The Chamber also suggested beefing up the existing tax credit.

He warned that narrowing the tax base could be detrimental to state revenues if there were a recession because people still buy food and other necessities during such times.

The right-wing Kansas Policy Institute was neutral on the bills, but CEO Dave Trabert said the current budget surplus may be temporary and advised cutting spending to match any tax cuts.

"We always like to see taxes cut because goodness knows we need taxes cut in Kansas," Trabert said. "Also, if the focus is to save money for people, and especially for those who are of lower income, a better way to do it would be to reduce the income tax."

Farm Bureau opposes food sales tax cut

The lone opponent to testify in-person was John Donley, representing the Kansas Farm Bureau, which opposes any reduction or elimination of the sales tax on food.

He predicted the state "will run out revenue" and future budgetary problems would lead lawmakers to eliminate the existing exemption for business-to-business sales. He also predicted it could lead to higher taxes on agricultural property, as well as a value added tax.

"While I believe this would be some fairly good tax politics, I don't believe this is good tax policy," Donley said.

"You're on the wrong side of this deal," said Baker, who is a Farm Bureau member. "Food sales tax is discriminatory."

Rep. Doug Blex, R-Independence, who is also a Farm Bureau member, agreed.

"We do have a people in need, we have a shrinking rural tax base population, and we're struggling how to maintain that rural environment, that Farm Bureau 'way of life' that most of us that live out in the rural enjoy," he said.

Jason Tidd is a statehouse reporter for the Topeka Capital-Journal. He can be reached by email at jtidd@gannett.com. Follow him on Twitter @Jason_Tidd.

This article originally appeared on Topeka Capital-Journal: Kansas food tax cut missed Gov. Laura Kelly's Kansas Day deadline