KEPC WEEKLY UPDATE: Breaking News! Subcmte reverses hwy cuts, rescission, income tax, liquor/tobacco, KPERS, farm property taxes, KanCare, E-verify, Unemployment

In this issue …

  • Subcommittee reverses highway cuts
  • Rescission bill signed
  • Governor’s income tax changes introduced
  • Liquor/tobacco tax increases introduced
  • KPERS bonding out of committee
  • Bill would increase farmers’ property taxes
  • KanCare expansion bill is printed
  • E-verify bill introduced
  • Unemployment Insurance re-do discussed


Subcommittee reverses highway cuts

A legislative subcommittee has voted to reverse Governor Sam Brownback’s proposed cuts to transportation in his 2016/2017 budget.

Thursday, the House Appropriations Subcommittee on Transportation/Public Safety deleted the transfer of $140 million in each of the next two years from the highway fund to other purposes. The motion to make the changes came from Representative Russ Jennings (R-Lakin). His amendment was passed on a voice vote.

The recommendation now goes to the full House Appropriations Committee, where its fate is uncertain.

The Kansas Department of Transportation disclosed this week in the subcommittee that it needs an adjustment to the current law 18% bonding cap for FY 2016 and 2017. KDOT is seeking a proviso in the mega appropriations bill for the 2016/2017 two year budget to allow that to happen.

The bonding cap change is necessary for KDOT to bond $250 million in Fiscal Year 2016.

It appears that the amendment deleting the highway fund transfer, that bonding cap change will not be necessary.

Subcommittee members Rep. J.R. Claeys (R-Salina) and Rep. Melissa Rooker (R-Fairway) reportedly expressed concern earlier in the week that the state would be using KDOT bonding authority to circumvent the state cash basis law.

The Topeka Capital-Journal quotes Jennings as saying, “It’s time we bring this to some level of curtailment. This would be the equivalent, to me, of running my credit up to the limit and then calling the bank and saying, ‘Oh, yes, by the way, there are a few more things I’d like to buy. Can I have some more credit? I think I’m going to be able to pay for it.’”

Meanwhile, there are reports that the transportation cuts are driving one Kansas construction company to move many operations out-of-state.

Wichita’s Sherwood Construction is moving several employees to Oklahoma and Colorado. The company built a new repair facility in Tulsa and has moved into a Tulsa office, while continuing to maintain a presence in Kansas.

Company founder Howard Sherwood told the Wichita Business Journal the company’s chief financial officer, technology personnel and estimators have moved to Oklahoma. “As the Kansas (highway) program quieted down, our emphasis has been more in Oklahoma where there is a more robust highway program,” Sherwood told the Business Journal.


Rescission bill signed

Governor Sam Brownback signed the rescission bill (H. Sub for SB 4) Tuesday, which deals with much of the budget shortfall for Fiscal Year 2015. A deficit of about $800,000 remains, but the intention is to clean that up with some actions in the big two-year mega-budget bill for Fiscal Years 2016 and 2017.

The bill was necessary because the consensus revenue estimates of November identified a $278.7 million shortfall for the fiscal year ending June 30. Additionally, January revenues were down $47.1 million.

Without action, Kansas would not have been able to pay its bills in February.

Because Kansas operates on a cash basis, and cannot run a deficit, the Governor issued an allotment plan totaling $280 million. It reduced expenditures by $66.4 million. It also included recommendations to transfer funds and adjust non-state general fund expenditures an additional $219.9 million.

The biggest piece was a transfer of $158 million from the state highway fund.

You can read a detailed summary of the rescission bill and where it gets the money from the legislature’s web site.


Governor’s income tax changes introduced

The Governor’s suggested changes to the income tax law have been introduced in the Kansas House (HB 2307). The bill adjusts current income tax rates, provides a tax amnesty, creates a budget stabilization fund, speeds up the reduction of tax exemptions, and sets up how future income tax rates will be determined.

The bill eliminates the requirement of a 7.5% ending balance, which has been routinely ignored in recent years.

When revenues grow over 2% of the previous year, the amount between 2% and 3% goes into a budget stabilization fund.

The language setting up an elaborate system for reducing future income tax rates is totally eliminated and a new system substituted:

  • Revenue growth over 3% goes into a tax reduction fund before August 15th, following the end of the fiscal year.
  • At the beginning of the next regular legislative session, the amount in the fund is reported to the governor and legislature.
  • The governor may recommend what income tax rate cuts go into effect for the next tax year, based on what’s in the tax reduction fund, subject to legislative approval.
  • If the governor doesn’t make a recommendation, the legislature can establish the tax rates.
  • If the individual income tax has dropped to 0%, the governor may recommend reductions in taxes on corporations, banks, and savings and loans. But the rate changes can only be established by an act of the legislature.

Here’s a link to the entire 16 page bill.


Liquor/tobacco tax increases introduced

The governor’s bill increasing taxes on cigarettes, tobacco products and alcoholic beverages is House Bill 2306.

It was introduced on Wednesday. Word late Thursday was that hearings on liquor and tobacco taxes would be held sometime next week.

Tax legislation and the 2016-2017 budgets will have substantial activity in the next week and a half. Next week is filled with subcommittee hearings on agency budgets and House Appropriations and Senate Ways and Means Committee meetings to work parts of the budget.

Lawmakers may need to know what tax adjustments will have a chance of passage before they can work the budget.


KPERS bonding out of committee

The legislation Governor Brownback requested to issue more bonds for KPERS is barely passed out of the House Committee on Pensions and Benefits.

The bill authorizes the issuance of $1.5 billion of pension obligation bonds to finance a portion of the unfunded actuarial liability of the Kansas Public Employees Retirement System. Critics have called the idea “borrowing to circumvent the cash basis law.” That’s much the same criticism heard over KDOT bonding.

The measure is House bill 2095. The vote was tied when committee Chairman Steven Johnson (R-Assaria) cast the tie breaker. The vote was 7 to 6. That may indicate the legislation could have problems when it comes to the floor of the House of Representatives.


Bill would increase farmers’ property taxes

As we have been predicting for several months, the 2012 and 2013 income tax cuts and the resulting revenue reductions are causing lawmakers to visit use value appraisal of agricultural property in an effort to find more money for public education.

Senate Bill 178 was introduced in the Senate Ways and Means Committee Tuesday and referred to the Senate Assessment and Taxation Committee on Wednesday. It was proposed by Johnson County Senator Jeff Melcher (R-Leawood).

Agriculture organizations hotly oppose the bill because it will increase property taxes on farmers, which is its intent. Some early estimates indicate ag land taxes could skyrocket.

As the result of the agriculture crisis of the 1980s, the Kansas Constitution was changed to require agricultural land to be valued for taxation based on its income or productivity. This is commonly called “use value” appraisal. The change was implemented in 1989, when farm values around urban areas skyrocketed because valuations were based on their development value.

Land values are now calculated based on the inherent capabilities of the land and agricultural income. They do not represent fair market value, nor is fair market value used in the calculation of the values.

The system uses an eight-year average to determine value, as well as net income. House Bill 178 changes that to a five-year average, based solely on cash rental rates.

This is already heating up.

At a meeting of the Senate Commerce Committee this week, economist Dr. Art Hall of K-U was giving lawmakers a briefing on the various economies of the state (manufacturing, service, etc). Toward the end of the meeting, the conversation evolved into an in-depth discussion of use value appraisal of farmland, with many urban Senators (including Melcher and others from urban areas) expressing strong support for changing the way agricultural property taxes work.

The Senate Tax Chairman, Les Donovan (R-Wichita) is said to be not interested in pursuing the bill. There is strong speculation such legislation would split conservative Republicans.

A similar measure is expected to be pursued in the Kansas House.


KanCare expansion bill is printed

A 19-page bill expanding Medicaid in Kansas, now known as the KanCare II expansion act, was introduced this week after several days of discussion about the issue in the House Vision 2020 Committee.

The measure is House Bill 2270. It’s unclear if it will get out of committee or see the light of day on the House floor, but the vast majority of the medical community is hopeful.


E-verify bill introduced

House bill 2294 requires the state or any local government that does more than $5,000 in business with any entity to require a sworn affidavit that it is registered and a good faith participant in the federal e-verify program.

E-verify requirements have long been opposed by a large coalition that has been watching immigration issues in Kansas for about four years. The coalition includes businesses, business organizations, agricultural organizations and local government and their organizations. The Kansas Economic Progress Council is part of the coalition as well.

E-verify is an internet based system that compares information from an employee’s Form I-9, Employment Eligibility Verification, to data from the U.S. Department of Homeland Security and Social Security Administration records to confirm employment eligibility.

Even with an error rate less than 1%, many workers get caught in a bureaucratic limbo trying to prove their right to work.

The cost to small businesses is estimated at over $2.6 billion per year nationwide to run the program.

E-verify is said to be prone to errors among young workers, women who change their name, Hispanics with multiple surnames, naturalized citizens, and legal immigrants. Many believe the affect of e-verify is to cause employers to avoid these groups when hiring.


Unemployment Insurance re-do discussed

Most Kansans don’t realize that unemployment insurance (UI) taxes paid by Kansas businesses total more than the individual income tax collected on businesses in 2012 (the year before the income tax cuts went into effect).

Legislators are hearing a proposal that would make major changes to the system, where employers pay a tax, which ultimately goes to pay unemployment benefits for laid-off workers.

Several reforms took place in Kansas over the past several years as the system went “bankrupt” due to the Great Recession. Federal dollars were loaned to Kansas (as well as many other states) to pay unemployment benefits and a system to pay back the feds was put into place.

The new proposal moves from an “arrayed” system to a “fixed” system. It is said to be based on an employer’s experience rating that reflects their usage of the unemployment system. Many businesses have complained they have had no claims or few, yet pay big UI taxes.

Natalie Bright, representing the Kansas State Council of the Society for Human Resource Management (SHRM) told the Senate Commerce Committee this week, “In essence, employers who have never had a benefit drawn on their account continued to see significant rate increases. In addition, an amount assessed against an employer would often vary greatly year to year.”

Bright was testifying in favor of SB 154. She said a working group came up with the bill, “which replaces the current arrayed methodology (where experiences are spread across all employers), to a fixed rating system (where tax is based on employer’s individual experience).”

The committee heard that 44 other states have a fixed system.

The issue is somewhat complicated and the committee will take time to make sure they understand it before taking action. The hearing on the measure will continue Monday.