KEPC WEEKLY UPDATE: Deadline, rankings fall, transpo reversal reversed, tobacco and liquor, passive income, tax bills, two can play that game, ROZ, unemplyment insurance, KS OSHA?

In this issue …

  • Deadline approaches
  • Kansas’ Tax Foundation ranking falls, despite income tax cuts
  • Transportation reversal is reversed
  • Tobacco and Liquor tax hearings held
  • Will Kansas tax “passive” income
  • Other tax bills introduced
  • In the “two can play that game” department…
  • Extending rural opportunity zones (ROZ)
  • Unemployment insurance discussion continues
  • Establish a Kansas OSHA?

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Deadline approaches

Friday, February 27, is the House of Origin deadline in the Kansas Legislature. That means most House bills must have passed the House and most Senate bills must have passed the Senate. Without action, they are likely dead for the session.

The exception (and it’s a big one) is for exempt committees. Those are Federal and State Affairs, Tax, and House Appropriations and Senate Ways and Means.

With the deadline close, most of next week will be spent on the floors of the House and Senate debating bills. Those that don’t make the cut can be “blessed,” a parliamentary procedure where they are sent to an exempt committee to keep them alive.

Kansas’ Tax Foundation ranking falls, despite income tax cuts

Kansas ranking in the Tax Foundation 2015 report on State Business Tax Climate has fallen. The Tax Foundation is a Washington, D.C. – based think tank founded in 1937 that collects data and publishes research studies on tax policies at the federal and state levels.

It is considered a conservative organization.

Despite the individual income tax cuts that went into effect in 2013, Kansas dropped three rankings overall, from 19th to 22.

Other states in the region and their rankings:

  • Missouri 17
  • Colorado 20
  • Nebraska 29
  • Oklahoma 32

Here are some of the other rankings in the report.

One is best and 50th is worst.

Unemployment insurance rate – Kansas ranks 9th best in the country. This seems ironic since the legislature is considering substantial changes to the UI system.

Individual income tax rate – Kansas ranks 18th in the country.

Property tax rate – Kansas ranks 28th in the country. New Jersey is considered the worst. However, we would note that studies by the Lincoln Land Institute have shown Kansas has very high rural commercial property tax rates.

Sales tax – Kansas ranks 30th in sales tax. Remember this is business tax climate. Sales tax on business is often overlooked when lawmakers consider the impact on business. This is not a good ranking and the state made the temporary sales tax increase permanent in 2013.

Corporate tax rate – Kansas ranks 38th in the country in corporate tax rate, something that was generally neglected in the 2012 and 2013 income tax reductions. That legislation eventually gets to reducing corporate taxes in the far future, if ever.

 

Transportation reversal is reversed

We reported last week that a legislative subcommittee voted to reverse Governor Sam Brownback’s proposed cuts to transportation in his 2016/2017 budget.

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.

After our report, the subcommittee met briefly and quickly reversed its decision. The Governor’s cuts have now been included in the 2016/2017 budget by the full House Appropriations Committee.

There was considerable discussion of the cuts in Appropriations.

Rep. Don Hill (R-Emporia) talked about how the T-WORKS program had the flexibility in the past to help fund NASCAR development and the Edgerton intermodal facility.  He worried about continuing that sort of flexibility with the new cuts from the program.

“I understand that we’re broke,” Hill said, but he is troubled about “travelling down that path.”  He said Kansas was “borrowing to fund the ongoing expenses of government.”

Rep. Jerry Henry (D-Atchison) asked how close the state is coming to taking not just sales tax revenues, but also gas tax revenue.  Subcommittee Chairman J.R. Claeys (R-Salina) said there was still $150 million left before sales tax money is depleted and motor vehicle fuels tax remains.  It was pointed out there is a prohibition from taking gas tax for the general fund.

Committee Chairman Ron Ryckman (R-Olathe) pointed out that under the transportation cuts, “some of the preservation has been put off to the out years.”

 

Tobacco and Liquor tax hearings held

The House Taxation Committee held two days of hearings this week on HB 2306, the Governor’s bill that raises alcohol and tobacco taxes. Even before the hearings began, Speaker of the House Ray Merrick announced that he opposes the tax hike proposals by Governor Sam Brownback.

Opponents at the hearing included longtime lobbyist Tuck Duncan, who represents the Kansas Wine and Spirits Wholesalers Association. Duncan made the point that if liquor taxes go up, Kansans in border areas will cross the state line to buy not only their liquor, but their cigarettes and gas in other states.

Jason Watkins of the Kansas Beer Wholesalers was very direct in criticizing the Governor for the proposal, saying he has not seen a proposal like this from the Administration, which proclaims to be pro-jobs. Watkins said the tax increase will add $1.30 to the cost of a case of beer. He also said the bill would cost 1,319 jobs in Kansas.

The Kansas Policy Institute also testified in opposition. Steve Anderson, former Brownback budget director, testified against his former employer’s bill, saying the state should not raise taxes but cut spending.

The room was packed the second day as anti-tobacco advocates supported the bill as a deterrent, especially for potential young smokers; and tobacco industry and various retailers discussed how it would hurt business.

Americans for Prosperity testified against both the cigarette and alcohol tax increases, saying such a policy based on single product taxes picks winners in neighboring states and losers at home.

 

Will Kansas tax “passive” income?

We haven’t seen the bill yet, but Senate Tax Chairman Les Donovan introduced a bill at Tuesday’s committee meeting that removes the income tax exemption from “passive income.”

Remember that the 2012 income tax cuts eliminated business taxes on “pass-through income.”

What is “pass-through income?”

Mark Robyn of The Tax Foundation wrote about it in a criticism when Kansas enacted the 2012 cuts.

He said “a pass-through business is distinct from a small business. In fact, it is primarily large businesses that account for a large fraction of the assets, revenues, and profits of pass-through entities…”

Robyn added that, “Tax policy that targets pass-through entities is thus not necessarily effective at targeting ‘small business.’”

This week, Secretary of State Kris Kobach announced an increase in business filings in Kansas for 2014, claiming it was a positive economic indicator.

However, the Robyn article a few years ago seemed to address what may be happening in Kansas:

“While favoring the pass-through structure over C corporations may lead to an increase in people employed by pass-through entities, not all these jobs are new.”

Robyn added,”…the new tax-exempt status provides a large incentive for new and existing businesses to organize as pass-throughs rather than C corporations. ‘New” pass-through entity jobs may just be reclassified C corporation jobs.”

 

Other tax bills introduced

Some bills introduced in the Senate Tax Committee on Thursday:

Senator Steve Abrams (R-Arkansas City) asked for a sales tax bill that eliminates a number of exemptions in current law. No bill is printed yet. It’s just conceptual. The exemptions have not been clearly identified yet, but Abrams says he’s looking for a way to draw a “clear line” on tax exemption treatment. Business to business exemptions would remain as well as churches. He said he is seeking to develop a clear policy that avoids case-by-case decisions on each exemption requested.

Senator Les Donovan (R-Wichita), the committee’s chairman, asked for four conceptual bills Thursday:

  • Eliminating the sales tax exemption on farm machinery and equipment
  • Eliminating the exemption from property tax for the first $20,000 of residential value
  • Eliminating the property tax exemption for renewable energies
  • Eliminating the sales tax exemption on residential utilities and agricultural utilities

 

In the “two can play that game” department…

Last week, we told you that Johnson County Senator Jeff Melcher (R-Leawood) is promoting Senate Bill 178, which changes use value appraisal of farmland in a way that would raise property taxes on agricultural property. Melcher seems to be bringing the subject up at every opportunity in committee meetings, saying farmers don’t pay enough.

Agricultural organizations are mobilizing to strongly oppose the bill.

Representative Don Hineman (R-Dighton), himself a farmer, asked the House Tax Committee Thursday for a bill concerning intangibles tax. Hineman is strongly opposed to Melcher’s bill.

This is just an educated guess, but a bill that raises the intangibles tax could be a form of retaliation against Melcher’s by proposing a tax on his constituents in Johnson County.

An intangibles tax is an annual tax assessed mostly by state governments on the current market value of certain assets, including securities. It’s sort of a property tax on investments.

The theory is that some people invest their money in property and have to pay property taxes. Others invest their money in “intangible property” such a stocks and bonds, and they should pay something as well.

In Kansas, it’s a little different. It’s a local tax collected by the state and levied on gross earnings received from intangible property such as savings accounts, stocks, bonds, accounts receivable, and mortgages. It’s up to the local government to determine if they want to levy it.

Counties, cities, and mostly townships impose it. It appears that in most places, the tax rate is 2.25%.

No entity in Johnson County levies an intangibles tax.  Does Hineman’s bill alter that?

If Melcher is arguing that farmers don’t pay enough property tax on their land, Hineman could conceivably argue that Melcher’s constituents don’t pay any property taxes at all on their intangible property.

I want to read that bill.

 

Extending rural opportunity zones (ROZ)

The ROZ program (Rural Opportunity Zones) will expire after Fiscal Year 2016, but a couple of bills are being considered that would extend the program. Both remove the 2016 sunset.

Under current law, the Rural Opportunity Zones Program offers individuals who relocate from outside the state to a county that has been designated as a Rural Opportunity Zone the opportunity to participate in a student loan forgiveness program and receive a 100.0 percent state income tax credit.

A hearing was held this week on the Senate version of the bill, SB 187, which extends ROZ for six more years. The House version is HB 2298.

In the Senate hearing, Representative Jim Kelly (R-Coffeyville) testified in support saying the program has been helpful in his county.

Larry Baer of the League of Kansas Municipalities said the program has helped cities fill vacant positions and attract new blood to positions like city manager and law enforcement.

There was discussion about adding Miami County to the list of ROZ counties.

 

Unemployment insurance discussion continues

Changes to the state’s unemployment insurance (UI) tax continue to be discussed this week.

Last week the Senate Commerce Committee began consideration. This week the House Commerce, Labor, and Economic Development Committee considered HB 2261 with some of the same testimony as the Senate heard last week.

As we reported at that time, 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.

However, there seem to be many questions about the change.

Justin McFarland, Director of Labor Market Information Services and Deputy General Counsel at the Kansas Department of Labor testified. He told the committee he supports the bill in concept and supports moving from an arrayed to a fixed system.

However, he was concerned that the structure of the change was not workable, saying you cannot have over 70% of the participants in the lowest cost rate group. Lawmakers appear to want to take their time with this legislation out of an abundance of caution.

On Thursday, Senate Commerce Committee Chair Julie Lynn (R-Olathe), said she plans to wind up hearings on the Senate version (SB 154) on Friday morning (today).

 

Establish a Kansas OSHA?

Should Kansas establish its own OSHA (Occupational Safety and Health Administration) to replace the federal program?

House Bill 2299 requires the Kansas Department of Labor to write and submit a state plan to the federal government by September 1, 2015. The idea would be to reach a cooperative agreement with the federal government for the state to take over OSHA’s current duties in Kansas.

The legislature would ultimately have to approve the agreement before it could take effect. That’s likely a three year process.

In testimony Wednesday, the House Commerce, Labor, and Economic Development Committee heard that 26 other states have a state level OSHA. Roughly half of the funding comes from the federal government and half from fines levied on businesses that are violators.