KEPC UPDATE: Feb 2, 2019

In this issue…
TAX: SB22 and Fed Tax Windfall
SPEND: Governor’s Budget Introduced in Committees
TRANSPORTATION: Final Report Issued
COMMERCE: Eco Devo Overview, HB 2006, HB 2043
SPORTS GAMING: Two bills introduced in Fed and State
MEDICAID EXPANSION: Governor unveils plan
MARKLEY MUSINGS: Things are starting to heat up

TAX: SB 22 AND FED TAX WINDFALL
The Senate Select Committee on Federal Tax Code Implementation held hearings this week on SB 22. Tuesday, Wednesday, and Thursday of this week were dedicated to testimony from the Kansas Chamber, tax attorneys, and corporations potentially affected by the Federal Tax Cuts and Jobs Act (TCJA), specifically how multi-national corporations during business in the United States and state income taxed owed. TCJA moves business taxes from a worldwide taxation system to a territorial system. Kansas is a rolling conformity  state, meaning that any changes to the Federal Tax code will flow through to Kansas unless the legislature specifically alters statute (often referred to as “decoupling”). Regarding corporations, there are two primary issues:

965 Repatriation of Foreign Funds: the Federal Act provides for a one-time tax at preferential rates on deemed repatriation of certain deferred income of US Owned foreign companies. These preferential rates are anticipated to bring back $34 trillion into the U.S. Current Kansas law allows for a subtraction modification of 80%, so only 20% of the dollars would be taxed. SB 22 allows for a 100% modification. These repatriated funds are a one time thing.  They cannot be relied on as a future revenue source

Global Intangible Low-Taxed Income (GILTI): the new law significantly broadens the scope of foreign earnings that had been subject to current US taxation, effectively imposing a worldwide minimum tax on foreign earnings and subjects US shareholders of foreign corporations to current taxation on most earned income. It is intended to deter taxpayers from locating high-value activities and assets in low-tax countries. SB22 seeks to decouple Kansas from this provision.

Individual Tax Filers: TCJA nearly doubled the standard deduction rate for individual tax filers: married filing jointly increased from $13,000 to $24,000. It is anticipated that almost 88% of federal tax payers will take the standard deduction.  Again, Kansas is a rolling conformity state, so the legislature would actively have to decouple to allow Kansas filers to itemize deductions on their state income tax.

The fiscal note for SB 22 is significant. $192 million for FY2020, $113 million for FY2021 and $118 million for FY2022.

On Thursday, the Committee approved the bills passage as amended (technical amendment). The full senate is anticipated to debate SB 22 this upcoming week.

SPEND: GOVERNOR’S BUDGET INTRODUCED IN COMMITTEES
On Thursday, Governor Kelly’s budget was introduced in the Senate Ways & Means Committee and and House Appropriations Committee. Ways and Means Chair McGinn divided her committee into subcommittees to work the different portions of the budget.

TRANSPORTATION: FINAL REPORT ISSUED
The Transportation Task Force issued it’s final report on Monday. Key recommendations include:
Creation of a new, long-term plan of at least 10 years that includes funding for preservation, modernization and expansion of our transportation infrastructure;
Restoration of funding for preservation to protect previous investment in our transportation system;
Prioritization and completion of 21 modernization and expansion projects that were announced but unfunded in the previous T-Works long-term plan;
Amending statutes to authorize KDOT, working with the KS Turnpike Authority, to modify restrictions on what tolling can pay for and allow exploration of tolling on local projects with appropriate community input and support;
Adding an exemption in the tax lid statute for transportation purposes and modifications to demand transfers and consider other revenue options; and
Supporting KDOT’s current project selection process but adding additional merit for projects identified as priority corridors and/or include local participation.

COMMERCE: ECO DEVO OVERVIEW – HB 2006, HB 2043
On Monday, Acting Secretary of Commerce David Toland gave an overview of our state’s primary economic development tools: Promoting Employment Across Kansas (PEAK), High Performance Incentive Program (HPIP), Rural Opportunity Zones (ROZ), Sales Tax Revenue (STAR) Bonds, Angel Investment Tax Credits, and the Job Creation Fund.

Two bills regarding economic development and incentives heard this week:
HB 2006: requiring the Department of Commerce to compile and disclose on their website data related to various economic incentive programs. The Kansas Economic Development Alliance (KEDA) testified against the bill, citing confidentiality and unfunded mandate concerns.
HB 2043: requiring an inventory and evaluation of all major incentives, tax credits, and exemptions. 

SPORTS GAMING: TWO BILLS INTRODUCED IN FED AND STATE
The House Fed and State Committee heard testimony on two bills related to the expansion of sports gaming in Kansas:
HB 2032: Introduced by Representative Frownfelter, allows for expansion of sports betting solely at racing facilities
HB 2068: The Kansas Sports Wagering Act, Introduced by Representative Kessinger, allowing for the expansion of sports betting conducted by the Kansas Lottery, through lottery retailers, casinos and racetrack facilities managers. It also allows for sports wagering through the internet and mobile apps.

MEDICAID EXPANSION: GOVERNOR UNVEILS PLAN
On Tuesday, Governor Kelly unveiled her plan for medicaid expansion. The proposal to expand to 150,000 Kansans, is almost identical to the plan that  passed the House and Senate two years ago, but was vetoed by then Governor Brownback.  The House failed to override the veto. The plan would cover Kansans under 65 years old who earn less than 133% of the federal poverty level.

MARKLEY MUSINGS: THINGS ARE STARTING TO HEAT UP
First of all, can we all agree that GILTI is a horrible acronym for taxable income? Seriously. Things are starting to heat up as bills are making their way through the committee process.  It looks like there will be some floor action next week, especially in the Senate. One thing I know for sure, the significant pieces of legislation: tax reform, budget, education, Medicaid expansion, etc., will change and look much different when we get to the end of session. Thanks for allowing me to be your eyes and ears in Topeka.  Please call or email me anytime. Until next week.

KEPC UPDATE: Week Two

Week two of the 2019 session is a wrap. Here are the highlights.

House Rules
On Wednesday, by a vote of 104-15, the House approved a package of rules changes, primarily dealing with transparency and increasing from 63 to 70 the number of votes needed to bring a bill “above the line” with one day’s notice. The new transparency rules mirror changes made last year as a matter of policy.

Representative Victors brought an amendment to allow breastfeeding of infants on the house floor. The amendment was approved and included in the package.

Wagle Creates “Special” Tax Committee
Senate President Susan Wagle formed a special committee to study SB 22, the legislation returning the revenue windfall attributed to the change in the federal tax code. Wagle appointed herself Chairman, and the committee is made up of eight members of the Senate Committee on Assessment and Taxation, with one notable exception: Chair Sen. Caryn Tyson. Wagle has scheduled hearings on Tuesday, Wednesday and Thursday of next week, with an anticipated Thursday committee vote on the bill.

KPERS Re-amortization
The Governor’s plan to re-amortize KPERS to free up $145 million has drawn strong opposition from the KPERS Board as well as Senate and House leadership. In presentation to Ways and Means and Appropriations, Alan Conroy, Executive Director of KPERS, noted that extending the current amortization schedule keeps KPERS vulnerable to volatile market conditions for many years.

It’s worth noting that while it’s important to debate KPERS funding, the state of KPERS is generally secure. KPERS has $19 billion in assets, with approximately $1 billion in yearly contributions.

Governor’s Cabinet
Governor Kelly continues to fill out her top administration posts. Posts named to date include:
• Secretary of Administration: Duane Goosen
• Secretary of Agriculture: Mike Beam
• Secretary of Transportation: Julie Lorenz
• Sec of Commerce: David Toland
• Secretary of Corrections: Roger Werholtz
• Secretary of Children & Family and Aging: Laura Howard
• Adjutant General: Lee Tafanelli*
• Budget Director: Larry Campbell*
• Superintendent of Highway Patrol: Mark Bruce*
• State Fire Marshall: Doug Jorgenson*
*Tafanelli, Campbell, Bruce, and Jorgenson are held over from the previous administration

Medicaid Expansion Group
Governor Kelly has created a committee to provide input on expansion of KanCare. There is a short timeline for the committee to meet and provide input, as the governor has stated she wants to have a plan by the end of January. Members are:
• Tom Bell: Kansas Hospital Association
• Rep. Susan Concannon: state representative
• Denise Cyzman: Community Care Network of Kansas
• Cathy Harding: Wyandotte Health Foundation
• April Homan: Alliance for a Healthy Kansas
• Kyle Kessler: Association of Community Mental Health Centers
• Dr. Lee Norman: Kansas Department of Health and Environment
• John Russell: Kansas Medical Society
• Michael Stephens: Sunflower Health Plan
• Suzanne Wikle: Center for Law and Social Policy
• Rep. Kathy Wolfe Moore: state representative

Tax Foundation
This week, the DC-based Tax Foundation, was in Topeka to discuss tax policy and present a well-deserved award. The Tax Foundation is one of the nation’s leading independent tax policy nonprofits. Each year, they recognize state policymakers who take steps to reform taxes to make them more neutral, transparent, stable, and pro-growth. The 2018 Outstanding Achievement in State Tax Reform honored Representative Steve Johnson and Representative Tom Sawyer, Chair and Ranking Minority Member of the House Taxation Committee. In announcing the award, the Foundation praise them for “…deftly handling difficult negotiations on solutions for closing the state’s recurring budget shortfalls and secured the repeal of the state’s decidedly non-neutral pass-through exemption…Its repeal represented the best way for the state to address its revenue shortfall.”

In Committee: Senate Committee on Ways and Means
On Tuesday, the committee held a hearing on SB 9. This bill authorizes the transfer of $115 million from the state general fund to KPERS State/School Group employer contributions for FY 2019. In FY 2016, Governor Brownback ordered $97 million in allotment cuts when he signed the state budget. The $115 million represents the $97 million, plus interest.

House Committee on Appropriations
The Appropriations Committee this week held several informational meetings
• KPERS
• K-State overview of the federal Agricultural Improvement Act of 2018 (known as the farm bill), specifically how it relates to research and extension programming
• Transportation Task Force Update: the committee heard an overview of the task force’s work done the past year, protections in state law for transportation funding, meeting locations and topics, makeup of the task force membership, and information on delayed T-WORKS projects, both modernization and expansion projects. The estimated cost for the 21 delayed projects is $535 million in FY 2020. That number increases to $600 million if spread out over the next five years. The task force anticipates that it will submit its report to the legislature early next week. I will send out a notice with links to the report as soon as it is available.

House Committee on Taxation
On Tuesday, the Department of Revenue gave an informational briefing on internet sales.

Hearings were held on HB 2033 and HB 2040, providing sales tax authority for Dickinson, Finney, Jackson, Russell, and Thomas counties. HB 2040 (Finney County) was incorporated into HB 2033 and passed committee on voice vote.

On Thursday, the committee held an informational meeting on itemized deductions. The Kansas Association of Realtors and the Kansas Society of CPAs testified.

Under current Kansas law, Kansas income tax filers may only itemize deductions on state income tax filings if the itemize on their federal return. The recent changes in federal tax law doubles the federal standard deduction. Because of this, many Kansans will not benefit from itemized deductions as they have done in the past (charitable donations, mortgage interest, property taxes, medical).

House Committee on Commerce, Labor and Economic Development
On Tuesday, the Commerce Committee held an informational briefing on Workers Comp litigation and medical standards. On Wednesday, the Greater Kansas City Chamber of Commerce (GKC Chamber) presented to the committee an overview of their Workforce Development Initiative. The GKC Chamber has made education and workforce development a top objective. They report that the Kansas City area currently has an immediate need to fill 63,000 jobs with qualified skilled workers. Coupled with a 2.7% unemployment rate, the need to train skilled workers and get more people in the workforce is clear.

Markley Musings
Several people commented this week that the tone in the building seems different this year. Some of that is to be expected. This is the first time in eight years that legislative leadership and the Governor are not of the same party. But it seems a bit more than that. People have started retreating to their “corners”, something that tends to occur towards the end of session, not the beginning. We will have to wait and see if and how this affects the body’s ability to craft sound policy and work for the good of our state. As always, please feel free to contact me with any questions, comments, concerns. I can be reached at 913-709-5985 or patty@markleystrategies.com.

KEPC UPDATE: Real state-of-the-state, KDOT answers, commerce quizzed, ed cmte reports, USD realignment

In this issue …

  • Legislators want to know the real State-of-the-State
  • KDOT answers questions about program/transfers
  • New Commerce Secretary quizzed
  • Education committee finally reports
  • “Realign” school districts?

 

Legislators want to know the real State-of-the-State

Legislative committees spent much of this week trying to figure out the real state-of-the-state, with a particular emphasis on the budget and the economy. A recurring theme from the Administration and legislative leadership was that because the unemployment rate is so low, businesses cannot expand due to a shallow pool of workers.

The latest unemployment rate is 4.0%.

Kansas has been lagging the region and the country for some time in employment growth.

Lawmakers also quizzed Brownback Administration officials about the slow growth of the Kansas sales tax. The major answer they got was that the oil and agriculture sectors of the economy are down.

In an appearance before the House Taxation Committee on Wednesday, Secretary of Revenue Nick Jordan said the state is “seeing some stabilization” in income tax. Corporate income tax is stable, the use tax is increasing, but the sales tax is not, Jordan said.

“Sales tax receipts have been a real challenge to us,” Jordan said, echoing comments by Budget Director Shawn Sullivan last week. Jordan said sales tax revenues are up in states on the East and West Coasts, but down in the Midwest. He said some of the problem with revenues may be timing. December Christmas shopping sales tax will not be reported until January.

Jordan said Kansas urban counties had healthy sales tax growth, but counties with economies heavy in oil and gas production and agriculture seemed to be where sales tax collections were down.

He also cited other reasons many Kansans might not be spending money on sales taxable items, including increased health care costs, online sales, and people using their income to pay off debt.

The sales tax growth question is important because Kansas is transitioning away from the income tax as a major revenue source, shifting the burden to a heavy dependence on the sales tax to fund state government.

For example, in 2012, the year the individual income tax cuts were passed, Kansas income tax collections made up 52% of the state general fund (SGF). In the current year budget (fiscal year 2016), that has dropped to 40.3%.

Meanwhile, dependence on the sales tax for the SGF has jumped from 40% in 2012 to 45.7% this budget year. A heavier dependence on an unstable sales tax means an unstable budget for Kansas.

Some legislators pushed back against Jordan’s take on the economy. Representative Kathy Wolfe Moore (D-Kansas City) said the income tax cuts are not working.

Representative John Edmonds (R-Great Bend) said, “The sun does not shine so bright in Western Kansas.”

Perhaps the strongest challenges came from Representative Mark Hutton (R-Wichita), who questioned Jordan on the correlation between income tax cuts and jobs.

He pointed out Governor Brownback has been taking credit for creating 76,000 jobs, but Hutton said half of those were created before the 2012 tax plan took effect.

Citing the estimated $700 million in income tax cuts, which he called an economic development investment, Hutton asked Administration officials, “What would you expect to be a return on that investment?” He could not get a straight answer in the opinion of many in the room.

Hutton’s question was pointed because some conservative legislators have been questioning the state’s traditional economic development programs, demanding that there be proof of a return on investment.

 

KDOT answers questions about program/transfers

Kansas Department of Transportation Secretary Mike King spent a lot of time this week testifying before legislative committees about the T-WORKS Program and answering questions about the heavy transfers from the highway fund to the state general fund.

The total transferred from the highway fund to the state general fund since 2011 is $2.124 billion, which doesn’t include the $47 million Governor Brownback transferred in November, or the $25 million he is now recommending be transferred for the FY 2017 budget.

There were also questions about KDOT’s bonds. The Department sold $400 million in highway bonds in December which brought the total bonds issued to 20% of the program. Last year’s legislature had lifted the 18% statutory cap on bonding the program for two years.

Some of the information provided:

  • Secretary King said when some current bonds are paid down, the total bonding will drop to 15% in FY 2018.
  • King said borrowing the $400 million in Fiscal Year 2016 takes advantage of low interest rates and would mean KDOT would not have to borrow in FY 2017.
  • King disagreed with the Alvarez and Marsal efficiency report that recommended closing KDOT area offices.
  • As the result of transfers from the highway fund last year, $250 million was removed from preservation projects. KDOT Deputy Secretary Jerry Younger said that would have paid for resurfacing, overlay seals, and patching. Younger said KDOT savings has allowed $50 million of that to be put back into preservation.
  • The low price of oil, which is a major cost in road projects, has resulted in savings.
  • Other savings have been realized by bids that are 10% to 15% lower than estimated on large projects
  • King said the Department continues to find efficiencies, has been refinancing bonds at lower interest rates, and projects are coming in under budget
  • King said modern asphalt mix is lasting longer, meaning roads that have it don’t need attention as often
  • The Secretary said that in the 6th year of a 10 year program, KDOT is beyond 60% of the projects it had scheduled. The bigger projects were handled at the beginning of the program

Representative Henry Helgerson (D-Wichita) asked probing questions about what is available to take from the transportation program in the future. King’s answer was, “It depends.” He said KDOT can do all of the work it’s supposed to for FY 2016 and FY 2017.

Asked if bonding was borrowing money to give to the state general fund, King said, “No!”

However, many legislators have noted that the amount borrowed is very close to the amount that has been transferred.

 

New Commerce Secretary quizzed

The man nominated to be Kansas Secretary of Commerce, Antonio Soave, appeared before a couple of legislative committees this week.

Already Acting Secretary of Commerce, Soave’s nomination must be approved by the full Kansas Senate. The Senate Commerce Committee recommended a favorable vote.

Some of Soave’s list of to-do items at the Commerce Department:

  • Adopt a system of proactive messaging and marketing
  • Emphasize Kansas quality of life
  • Publish a Department of Commerce Newsletter, both electronically and printed for mailing
  • Begin an extensive social media campaign on Kansas
  • Focus on research for prospective businesses
  • Don’t lead the conversation with prospects with incentive packages
  • Emphasize the ease of doing business
  • Tout the Kansas workforce
  • Build trust with prospects
  • A new Commerce Department website is planned: kscommerce.biz (not yet up)
  • Commerce needs 8 to 12 “consultants,” perhaps part-timers, who will generate leads

Soave said Kansas is not taking advantage of “direct foreign investment” in the state.

Senator Jeff Longbine (R-Emporia) urged Soave to take advantage of local economic development organizations, something Soave did not mention in his prepared remarks.

Senator Jeff Melcher (R-Leawood), who has strongly questioned some of the state’s economic development programs, asked if the “products” were working and how to measure return on investment.

Soave promised to provide “due diligence and assessment” of the incentives.

Soave most recently was chairman and CEO of Capistrano Global Advisory Services. He is a lawyer and has a Master of Law degree. He has a widely varied background and lives in the Kansas City area.

 

Education committee finally reports

An education committee of the legislature that met during the interim finally issued a final report this week. It’s very unusual for an interim committee to not conclude its work prior to the beginning of the session.

The K-12 Student Success Committee adopted a report drafted by the Legislative Research Department which was based on testimony the group received. Although the report contained recommendations and suggestions for a new school finance formula, a new formula was not proposed.

You can access the full report here which includes a minority report which disagrees with many of the recommendations.

Some of the report’s recommendations are controversial. Here’s a sampling:

  • Current state assessment testing should be reevaluated and revised to avoid “teaching to the test.” The recommendation said the assessments had “inconsistent standards of proficiency,” and cumbersome technology requirements.”
  • The state should provide funding for each student to take the ACT exam
  • The state should encourage other measures of outcome achievement, such as the Work Keys exam
  • An exam aligned with the Rose Standards should be developed by an objective third party with no connection to the State Department of Education or the Federal Department of Education
  • At-risk funding should not be based on the poverty level of the student
  • Any poverty measure for at-risk funding should be based on information provided by the Kansas Department of Revenue and the Kansas Department of Labor
  • Applications by parents or guardians for a school district to receive at-risk funding should be available for audit.
  • A state building architect and project manager should be used in any new building project to reduce costs
  • A special legislative committee should be created to approve any bond issue before it is placed on the ballot for local voters, if the school district wants to obtain capital improvement state aid

The report will probably be reviewed by the regular Education Committees of the Kansas House and Senate. Many observers and leadership doubt a new school finance formula will be written this year.

 

“Realign” school districts?

A bill to “realign” Kansas school districts has been introduced by the Kansas House Federal and State Affairs Committee. It would result in cutting the number of Kansas school districts in half.

Representative John Bradford (R-Lansing) asked for the bill to be introduced.

The bill requires the State Board of Education to:

  • Realign school districts every ten years
  • In counties with less than 10,000 students, there will be one school district
  • In counties with more than 10,000 students, boundaries are to be changed so that a district must have 1,500 or more students

There’s a lot more in the bill, including a limitation on the number of administrators.

Here’s a link to the bill.

No hearing has been scheduled on the measure, but it’s getting a lot of media attention. It’s been sent to the House Education Committee.