KEPC UPDATE: June 30 deadline looms – what now?, raise income taxes, new biz filings debunked, blistering attack on bix exemption, hearing on tax lid

In this issue …

  • Court gives legislature until June 30 to fix school funding
  • What now on school finance?
  • Ruling means more pressure to raise income taxes
  • KCEG debunks arguments on new business filings
  • Tax Foundation publishes blistering attack on business exemption
  • Hearing Wednesday on property tax lid

 

Court gives legislature until June 30 to fix school funding

The Kansas Supreme Court unanimously ruled Thursday that the Kansas “block grant” system that was to temporarily replace the school finance formula is unconstitutional.  The Court retained jurisdiction of the case and is giving the Kansas Legislature until June 30 to pass something constitutional.

In its ruling, the Court says about a fourth of all students are not being properly educated:

“Plaintiffs have shown through the evidence from trial-and through updated results on standardized testing since then-that not only is the State failing to provide approximately one-fourth of all its public school K-12 students with the basic skills of both reading and math, but that it is also leaving behind significant groups of harder-to-educate students.”

The Court did not give the legislature a dollar amount that must be spent on K-12.  There is speculation the legislature could return to a form of the old formula and boost spending on at-risk students as a quick way to appease the justices.

The number most mentioned comes from the Kansas Department of Education, where Deputy Commissioner Dale Dennis was saying before the decision he thought it would take about $520 million.

The ruling by the Kansas Supreme Court that Kansas’ block grant system for public education is unconstitutional is no surprise and has been widely expected for months.  The block grants limited public school spending by the state and were a thinly veiled attempt to protect the 2012 income tax cuts by reducing the pressure to repeal them.

Having closely watched the new 2017 Kansas Legislature, it’s clear a strong bi-partisan majority of lawmakers understand the damage done by the income tax cuts because they passed legislation to reverse them.  Unfortunately, that legislation was vetoed by Governor Brownback.

It’s also clear a strong bi-partisan majority support public education and will do what’s necessary to follow the Court’s ruling and correct the funding structure, although that will be a difficult process.

Here’s a link to the 83-page decision.

 

What now on school finance?

Although there have been some hearings on bills introduced to deal with a new school finance formula, none have passed out of committees.  Key committees have been mainly studying the problem and may have been waiting for the direction of the Kansas Supreme Court before proceeding.

Activity is expected to speed up almost immediately when lawmakers return to the Statehouse Monday after a nine day mid-session break.

 

Ruling means more pressure to raise income taxes

The ruling puts pressure on legislators to come up with more revenue, particularly efforts to revisit income tax increases following Governor Brownback’s veto of House Bill 2178, which would have provided $590 million to the state for Fiscal Year 2018.

The House overrode the veto 85 to 40 (84 are needed to override a veto).

The Senate voted 24 to 16, three votes short of the 27 needed to override.

Here’s what was in the bill:

  • The business tax exemption is eliminated
  • A third tax bracket is added of 5.45 percent. It applies to single taxpayers that make more than $50,000 and married taxpayers that make more than $100,000
  • The bill is retroactive to January 1 of this year
  • Medical deductions (which were eliminated previously) are restored at 100 percent
  • The so-called March to Zero trigger mechanism that lowers income taxes in the future is eliminated

One possible path is to re-introduce the measure and see if three more votes can be picked up in the Senate with the knowledge that the Supreme Court has given the legislature a deadline.

Another path is to tweak the legislation to pick up three Senate votes and hope that the rest of the votes in the Senate and House will hold up under another veto.

In a statement reacting to the ruling, Governor Brownback says in part, “The Kansas Supreme Court correctly observes that our education system has failed to provide a suitable education for the lowest performing 25 percent of students.  The old funding formula failed our students, particularly those that struggle most.”

That statement is misleading.  The Supreme Court was talking about the failure of the Governor’s block grant system, not the old funding formula.

Here is Governor Sam Brownback’s complete statement reacting to the ruling.

 

KCEG debunks arguments on new business filings

Our friends at the Kansas Center for Economic Growth, have done some impressive research that strongly challenges Governor Brownback’s claim that his income tax cuts have created new businesses in the state.

The KCEG information using data from the Kansas Secretary of State’s Office shows that new business filings in Kansas are still below pre-recession levels, even with the income tax cuts. That occurs when you subtract the businesses that have gone away during the period.

The study also shows that employment growth at businesses that received the “pass through” income tax break lags the United States and much of the region.

Colorado, Nebraska, Missouri, and Oklahoma all had higher employment growth in pass through businesses.  Arkansas and Iowa had lower growth than Kansas.

Both the analysis of new business filings and employment growth provide no evidence that the 2012 income tax cuts have had an impact.

The charts are particularly illustrative.  Here’s a link to the information.

 

Tax Foundation publishes blistering attack on business exemption

The nonpartisan Tax Foundation in Washington, D.C. was often quoted during and after the 2012 debate over Kansas income tax cuts in efforts by supporters to justify the cuts.

Since then the respected research organization has been very critical of Kansas income tax exemption for business.

On February 21, the organization published online a blistering attack on the exemption, reminding readers that, “We described the pass-through carveout as ‘an incentive to game the tax system without doing anything productive for the economy.’  We acknowledge that pass-through entities face higher tax burdens than C-corporations, but argue that a tax carveout or reduced rate compared to wage income is administratively challenging and difficult to justify.”

The online story continues, “The Kansas pass-through carveout has no place in a good tax code.  It also destabilized the budget and made revenue projections volatile.”

“Kansas prior attempts to resolve its budget issues focused on temporary, short-term solutions – emptying the rainy day fund, raiding program reserve funds, and offering bonds on its tobacco revenue stream.  These were not sustainable fiscal solutions. “

Here’s a link to the entire online report.

 

Hearing Wednesday on property tax lid

There’s no bill number yet, but a hearing will be held Wednesday in the House Taxation Committee on a bill that changes the 2015 local property tax lid process from a mandated election to a protest petition election.

Current law caps cities’ and counties’ ability to raise property tax revenue up to 1.4 percent of their 2018 budget, taking into account some exemptions.  The percentage is calculated via a formula involving the Consumer Price Index and will vary from year to year.  In order to exceed the cap, a local election must be held to decide whether the increased spending takes effect.

Local governments say the current election provisions are incomplete.

The new proposal from the League of Kansas Municipalities (in conjunction with the Kansas Association of Counties) says an election will not be held unless a ten percent protest petition is turned in within 21 days of local government publishing a notice about the increased spending.

The ten percent is based on the number of voters who participated in the last city or county election, depending on which entity is proposing the budget.  If there is no protest petition (or not enough signatures), the increase can be implemented.  If an election is forced and voters do not overturn the increase, it can be implemented.

The protest petition election does not alter the tax lid law, only the election process.