For Kansas lawmakers and Gov. Sam Brownback, a sales tax increase was the most workable solution to the state’s revenue shortage problems.
But for many businesses, shoppers and government officials in Johnson County, the increase creates a situation rife with possibility for unintended consequences for development, local budgets and business profits.
Could the higher rates deter developers, who have been getting incentives from cities based on special sales taxing districts? Will the 0.35 percentage point increase be enough to push shoppers to Missouri, where the state tax is lower on food and alcohol can be bought in grocery stores? The Missouri sales tax on food is 1.225 percent, compared to Kansas’ new sales tax of 6.5 percent.
So far, it’s all a big question mark. But local officials say they will watch closely for the sales tax impact on their budgets in the months ahead.
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The state sales tax rate increase — from 6.15 percent to 6.5 percent — had its debut July 1. It’s far too early to tell much of anything, say local leaders.
But some effect on development is expected.
“Any sort of adjustment to the tax rate is going to have some level of impact on commercial development,” said Andrew Nave, executive director of the Shawnee Economic Development Council.
That’s because since 2009, Kansas cities have used the increasingly popular Community Improvement District as a tool for luring developers. With Community Improvement Districts, and their cousins, Transportation Development Districts, cities can charge a higher sales tax within set boundaries and use the revenue to help offset some of the development costs.
It’s not unusual for cities in Johnson County to have multiple special taxing districts. Overland Park has districts to support development and redevelopment at Deer Creek, Hawthorne Plaza and Prairiefire, to name a few. Lenexa has used them for its City Center East, Prairie Creek and Greystone South developments and Olathe has them for the Olathe Conference Center and Olathe Pointe.
Developers typically seek city taxing districts when the building site has problems that would make building there more costly, Nave said. If revenue is reduced as people cross the state line, that could make the special districts less effective.
“I don’t think it will mean the end of developers seeking these tools,” said Nave. “I think it will make developers pause to evaluate is the CID or TDD the best tool for their development.”
Closer to the state line, Prairie Village has two special districts, for the Village Shops and Corinth Square. The sales tax is 9.725 at the shopping centers.
There aren’t any other special sales tax districts being discussed right now, said City Administrator Quinn Bennion, so it’s not an issue with the city currently. But in general, he said, it could make a tougher sell on the districts. “It would impact and it would have changed the dialogue for the council and staff,” if such a proposal was currently on the table.
What no one is predicting, at the moment, is whether shopping patterns will change. Although some city officials typically denote a 10 percent total sales tax as an important threshold they don’t want to cross, Nave pointed out that some districts have already reached that point. “Multiple shopping centers in Johnson County are over 10 percent and they continue to do quite well,” he said. “Consumers don’t make decisions just based on tax rates.”
And indeed, the tax rate was not the only issue for some Johnson Countians who said they would change where they shop. Fairness also played a part.
Sarah Kabala of Overland Park said moral outrage over shifting the tax burden is the reason she’ll go to Missouri for purchases over $5 whenever she can.
Everyone in Kansas will pay a higher sales tax rate to make up for money lost when the income tax was cut for certain businesses. “I just in general feel kind of morally outraged that the responsibility for supporting society has been handed off,” she said.
Likewise, Doug Fishel of Prairie Village said he plans to go east one mile from his home to the state line whenever it’s practical. “It bothers me a great deal that people of my income class are being asked to bear the brunt of taxes for the wealthy,” said Fishel, a college instructor.
Neither are happy about the position their decision puts them in with smaller business owners they have developed friendships with. Fishel said he doesn’t really blame them for taking advantage of the tax cut. But the same cuts are also benefitting the wealthiest Kansas residents, he said.
“I’m between a rock and a hard place,” he said. “We’re very committed to shopping with local business so the money stays in the community.”