Legislative Update – February 14, 2017

Last Thursday was supposed to be the day the Kansas Senate met in a spirit of tough but earnest compromise to finally forge a lasting solution to the toughest question they will face:  how to close the looming budget shortfall.

Down! Set! Nope.

The Senate Assessment and Taxation Committee had passed out a package said to restore structural balance to the Kansas tax code. The package raises the lowest income tax rate paid by individuals from 2.6% to 3.0% and the highest rate from 4.6% to 4.9%. It also eliminates the so-called LLC exemption, the highly controversial feature of the 2012 tax package which exempts income earned by pass-through business entities from state income tax. The bill is estimated to raise about $290 million in revenue the first year and over $350 million annually after that.

At about the same time, the Senate Ways and Means Committee finished its work on the large budget cutting bill which saves roughly $343 million in state spending in large part by cutting $128 million for K-12 public education funding and just over $23 million from higher education funding. The rest of the savings comes from budget reductions to a variety of other state agencies and from delaying repayment of $90 million the state borrowed from KPERS last year.

Each of these all-important fiscal bills was cued-up for discussion on the floor of the Senate on Thursday morning. Republican leaders apparently believed they had managed the process so that enough Senators were standing at the ready to vote Yes. But no sooner had the 8:00 A.M. session been gaveled in than it was promptly adjourned so each party could huddle-up separately and double-check their numbers. Once Republican leaders figured-out they did not, in fact, have the votes to pass these tandem packages, they called the whole thing off until the following week.

 The medicine which some Republicans (and presumably all the Democrats) simply could not swallow was the 5% cut in public school funding. Senate leadership attributed this apparent change of heart to a withering lobbying effort by educators but reticent senators countered that they are quite capable of thinking and speaking for themselves and they simply are not willing to take that much more money from public schools.

The same scene is set for this week but whether the wheels are any less likely to fall off this time is yet to be seen.

Meanwhile Across the Dome

The House Taxation Committee passed its own package on Thursday. The bill raises individual income tax rates and creates a third tax bracket. It also closes the LLC exemption and makes medical expenses fully deductible against income. The bill is preliminarily estimated to raise roughly $500 million and is headed for the full House for a debate which, hopefully, will not collapse before it even begins.

Other Items of Interest

On Thursday, a bill was introduced in concept in the Senate which would suspend for 3-years three of the state’s most important and impactful economic development programs:  the High-Performance Incentive Program (HPIP) and Promoting Employment Across Kansas (PEAK) and STAR bonds. HPIP and PEAK have been key tools used by the Department of Commerce to help attract new and expanding employers to the state. Economic development groups across Kansas, including Go Topeka, rely on the state as a partner in the never-ending effort to draw new and higher paying jobs to the region. Suspending these programs could essentially remove the state as a resource, leaving local economic developers on their own. The Topeka Chamber will work in concert with other chambers of commerce and economic developers to strongly oppose this legislation.

The House Local Government committee held hearings on a bill which empowers cities to allow adults to carry alcoholic beverages within tightly prescribed areas immediately adjacent to buildings where the liquor was sold. Committee members seemed generally receptive but listened intently to enforcement concerns raised by the Division of Alcoholic Beverage Control, as well as questions about liability raised by bar owners. The legislature may be slowly warming to this concept, which young professionals and the young at heart consider to be thoroughly modern and long past-due in Kansas, but there is still much work to be done before a bill which satisfies various important concerns can be passed.

The House Health and Human Services Committee heard testimony from both sides of the Medicaid Expansion debate. House Bill 2064 creates the Bridge to a Healthy Kansas program. The Bridge to a Healthy Kansas would require participants to be accountable by requiring them to participate in a work referral and job training program to remain eligible for expanded Medicaid. It will be budget-neutral, as well. The cost of insuring more Kansans will be offset by new federal funding, reductions in health care spending and revenue gains that result from insuring more people. While the Affordable Care Act, as such, may be changing, most elected officials at the federal level, from President Trump through Congress, espouse the goal of insuring as many Americans as possible. However, the federal law evolves in this area, it will almost certainly continue to entail some form of federal reimbursement for those states which have taken on the additional burden of expanding their Medicaid coverage. It will be critical that Kansas expand Kancare to establish a fair baseline for federal funding, whether in the form of a block grant or otherwise. Because the Chamber supports common sense compromise on the issue of closing the Medicaid coverage gap and the Bridge to a Healthy Kansas is the right solution, the Chamber testified in favor of this program.

Legislative Update – February 7, 2017

Just over three weeks into the 2017 legislative session and there have been no major plot twists. The overarching concern of all is still the gaping difference between how much money the state is expected to bring in over the next couple of years and how much it will spend.

Another Positive Revenue Report

On a lighter note, the Department of Revenue reported that, for the third month in a row, the State of Kansas brought in just a little bit more revenue that it expected to. In January, tax receipts were almost $24 million ahead of projections. Some cite this as evidence that the Kansas economy is on the upswing. Others note the bar had already been lowered several times, so the fact the state was able to step over it proves little. Legislators gave the news a half-hearted “Huzzah,” and quickly put their heads back down to the task of finding almost 15 times that amount by June 30.

Senate Tax Bill

Senate leaders brought forth their package for reforming the state’s tax code. The Senate bill does two things. First, it raises the individual income tax rates paid by individual Kansans. (The lowest rate would go up from 2.6% to 3.0% and the highest rate would go up from 4.6% to 4.9%.)  Second, it eliminates the so-called LLC Exemption. All told, the bill would raise an estimated $288 million in the year beginning July 1, 2017 and closer to $372 million the following year. This package is said to have a good deal of support amongst Republicans in the Senate and is expected to move quickly, though the Governor quickly scolded the Senators publicly for announcing a plan which he says punishes the middle class and job creators.

Arguments for and against the bill were heard in committee yesterday. These are more or less the same themes explored by more or less the same people who appeared last week before the House Taxation Committee, which has been debating the same issues, though in the form of multiple bills rather than a single package. Those favoring the bill contend the LLC Exemption and the other tax cuts passed in 2012 have not achieved job growth as promised. Opponents hold the Kansas economy and jobs picture is actually better than it would have been without the tax cuts and that most of the blame for revenue shortfalls lies in falling oil and commodities prices. They urged committee members not to risk damaging the Kansas economy by raising taxes  but rather to redouble their efforts to curb spending and make the government more efficient. The tax package is expected to head to the full Senate in very short order. (In fact, just seconds before this update was sent to press, the Senate Assessment and Taxation Committee was on the verge of passing the bill and sending it to the Senate floor.)

Concealed Carry

Following hearings teeming with some Kansans worried by the prospect of strolling across campus next to a gun-toting classmate and other Kansans worried about running into that classmate without being armed to defend themselves, the Senate Federal and State Affairs Committee killed a bill which would have exempted college campuses from the requirement that they allow concealed carry as of July 1, 2017. A number of other bills in the House designed to accomplish the same thing are still being considered. So this issue is far from over.

Other Bills of Interest

The Senate Committee on Ethics, Elections and Local Government completed its hearings on a bill to streamline the process cities use to recover abandoned houses and put them into the hands of organizations which will rehabilitate them. Cities like Topeka are advocating for this change in the law and the Chamber expressed its support. Click here to read the Chamber’s testimony. The bill balances the individual rights of property owners against the rights of neighbors and municipalities trying to address the pervasive problem of blight.

The House Health and Human Services Committee will hold hearings this week on the Kancare Bridge to a Healthy Kansas program. This program could be Kansas’ response to the problem of 150,000 Kansans who make too much money to qualify for Medicaid but not enough to afford private insurance. The bill makes those individuals eligible for coverage under Kancare, the state’s Medicaid program, and takes advantage of the federal government’s obligation under the Affordable Care Act to reimburse 90% of the cost. Even though the future of the ACA is uncertain, Kancare should be expanded to ensure the State of Kansas is in the best position possible to benefit from whatever system Congress develops in lieu of Obamacare. Click here to read the Chamber’s testimony.

 

Legislative Update – January 31, 2017

The House Taxation Committee finished its second day of hearings on a bill which would eliminate the income tax exemption for pass-through business entities. Removing the pass-through exemption would bring in something in the neighborhood of $180 – $200 million in revenues. Opponents of the bill argued the tax exemption has helped small business in Kansas and has led to job growth. Those arguing to eliminate the exemption disputed those claims and contended job growth has actually shrunk in the years since the exemption took effect. Others conceded the time may have come to remove the exemption, but expressed concern that the House bill would take effect as of January 1, 2017. They contend this retroactive change in the tax law would be disruptive to the tens of thousands of Kansas businesses which have planned their tax year around the exemption.

An increasing number of legislators acknowledge they think the LLC exemption will be going away. It’s just a matter of handling it in the least disruptive way and of packaging this change in the tax law with a comprehensive long-term set of solutions to the state’s revenue problem.

The Senate is said to be building just such a package. Leadership in that chamber is floating a number of ideas across the Republican caucus in hopes of identifying those ideas which are least objectionable and could form the basis for a passable tax reform package.

Balancing the Budget

The House Appropriations Committee held hearings on the Governor’s plan to borrow about $317 million from the state’s idle funds. They have not yet decided they think that is a good idea; it may be among their only palatable options for obtaining the quick cash needed by June 30. Various budget subcommittees also set to work dissecting the Governor’s budget plan and collecting their own ideas as to which agency budgets can withstand further reductions between now and the end of the fiscal year. On Wednesday, the state will issue its January revenue report and that will give lawmakers a clue as to whether the $350 million shortfall projected for the end of this fiscal year is close to accurate or whether they may be looking at even deeper cuts.

KanCare Expansion

A bill to finally expand the state’s Medicaid program, called Kancare, and take advantage of the federal government’s commitment under the Affordable Care Act to foot 90% of the bill will come on for hearings next week. The Topeka Chamber plans to submit testimony in favor the bill, the Kansas Bridge to a Healthy Kansas Program. Granted, the ACA is headed for major change, if not repeal, now that Republicans dominate both houses of Congress and President Trump is in the White House. Even if “Obamacare” as such is dismantled, most observers agree Congress will develop some type of program for helping states insure the underprivileged. It makes sense to get in the program now to ensure Kansas’ share of that new program is as high as possible. The Bridge to a Healthy Kansas is good for Kansans, good for Kansas’ healthcare providers and good for the state’s economy.

Concealed Carry

A good candidate for Most Dramatic Moment of the Session So Far was the hearing last week before the Senate Federal and State Affairs Committee of a bill regarding concealed carry on college campuses. The hearing room was full to overflowing last week, with more than one hundred concerned citizens pouring into the hallway outside.

Under the current Personal and Family Protection Act, public buildings cannot bar people from coming inside with concealed weapons unless the building has been set-up with security to ensure that NOBODY can come in with a gun. That law has a section which allows colleges and mental health clinics, among others, to apply for an exemption. But they can only be exempt until July 1, 2017, after which date even colleges and mental health clinics will have to allow people to bring in concealed guns. The Senate bill being considered this year takes that section about colleges and mental health clinics and deletes the line, “until July 1, 2017.”  If it passes, those kinds of institutions will have an ongoing ability to exempt themselves from the Personal and Family Protection Act and bar concealed guns from their premises permanently.

Those arguing for the bill contend college campuses are meant to be learning environments. College is stressful enough without the added worry that a fellow student might be armed. Others held the decision whether to allow concealed weapons on a campus or elsewhere is a matter for local government officials, not the state to decide. Finally, the argument was made that the original Personal and Family Protection Act was passed in a time when Kansas still required individuals to obtain training and permits before they could carry a hidden gun. As that is no longer the case, simply allowing anyone who wishes to take arms and roam our campuses is antithetical to the vision of college as a safe place where young adults can be explore a multitude of new ideas and experiences.

Those opposing the bill defended gunowners’ Second Amendment rights. They also argued that guns already pervade our nation’s college campuses. Laws banning them only have the effect of preventing law-abiding students and faculty from preparing to defend themselves. They recall that the original Personal and Family Protection Act was something of a compromise. Any public building which undertook to install enough security apparatus to ensure that all guns were kept out can lawfully ban concealed guns. The compromise was that colleges and universities were given four years to secure themselves. The Senate committee will presumably work on the bill this week. It is difficult to judge whether it has enough supporters to a pass out of committee.

Legislative Update – January 24, 2017

METL:  Stronger Together

On Tuesday, January 17, representatives from chambers of commerce for Manhattan, Emporia, Topeka and Lawrence gathered at the historic Dillon House for the first ever METL:  Stronger Together reception. These business groups have been discussing for some time the value of working together as a region. The reception was designed to bring together the 28 state legislators who represent that region and give them a sense of the influence they could have in the legislature if they coordinated their efforts and spoke with one voice. As many as 50 business leaders and chamber executives from these communities traveled to Topeka for the event and over half of the legislators were able to slip away from the Statehouse to chat with this very engaged group about how bright our collective future could be. Stay tuned as METL charts the course for subsequent activities. Thanks to the Dillon House for providing an unequaled venue for this gathering, directly across the street from the Statehouse. Thanks also to Aboud’s and Palace Liquor for making sure the guests were well-fed and refreshed.

The Governor’s Plan

Legislators learned more this week about how Governor Brownback would like to balance the budget. They are solving two puzzles. The first is how to find the roughly $350 million the state needs to pay its bills until June 30 of this year. The second is how to construct a two-year budget that will balance from July 1, 2017 to June 30, 2019. The Governor proposes to borrow about $318 million from a state entity called the Pooled Money Investment Board, where hundreds of miscellaneous state funds are kept until the money in them needs to be spent. The state would agree to pay itself back over seven years. The average Kansan will be relieved to know members of the House Appropriations Committee seemed just as perplexed by the detailed explanation they received this week as, well, the average Kansan would have been. The state does occasionally borrow from itself as a way of managing cash flow (because bills come due throughout the year and many taxes flow in around April). The proposed 7-year mortgage against these idle funds is unprecedented, though, and it is definitely a one-shot proposition; there won’t be any way to take-out a second mortgage on those funds. Aside from confusion, some legislators also expressed disappointment that this is far from the sort of long-term structural fiscal reform their voters sent them to Topeka to enact. The state needs cash, though, and this plan would provide it. So this part of the Governor’s plan seems relatively easy to swallow.

The Governor has also suggested the state sell its right to receive close to $50 million each year from the tobacco settlement fund in exchange for roughly $500 million in cash now. Legislators have, thus far, not been receptive to this idea. Increased taxes on cigarettes and liquor are also on the table, as well as, returning passive income (like rents and royalties) to the tax rolls and cancelling a scheduled reduction in the lowest income tax rate Kansans pay from 2.7% to 2.6%. The Governor agrees that rate should stay at 2.7% for now.

While lawmakers, especially conservative ones, have very little desire to vote for tax increases, many of them appear to recognize that the state’s current budgetary shortfall may require some form of what is now euphemistically called “revenue enhancement.” If they are going to have to raise taxes, no one in the legislature, particularly House members who face their constituents again in just two years, is at all fond of the idea of voting more than once to do so. Most legislators favor a comprehensive approach; a major bill which has been very carefully put together, which solves the problem once and for all and which gathers all the painful decisions in one place where they can be dispatched with a single uncomfortable vote. (Just such a “Mega Bill” is said to be under construction as this legislative update went to press.)  The problem is the state needs money now and it will take time to draw-up a comprehensive long-term solution. This tension between the need for immediate cash and the desire to really work this through and get it done right the first time creates one of the key dynamics this legislative session. The other key is still waiting restlessly across the street in the Judicial Center: the yet to be announced supreme court ruling on school finance. 

LLC debate

Last week, the House Taxation Committee heard testimony on HB 2023, the bill which would repeal the income tax exemption for pass-through business entities. As many as fifty people came to Topeka to make their case before the committee and they represented all sides of the issue. Some were small businesses testifying the small-business tax break had enabled them to grow their businesses. Others noted that, while they appreciated the special tax treatment which has been accorded businesses like theirs, they’ve always made hiring decisions based on whether their business needed the help; not on taxes. Besides, some of them said, the amount they’ve saved in taxes has never been enough to pay for even a single new full-time employee. The Governor’s Administration, for its part, contended the pass-through exemption has fulfilled its purpose of creating news businesses and jobs in Kansas, though, some of the legislators questioned aloud whether jobs numbers could legitimately be attributed to the 2012 tax law or are really the result of localized efforts and conditions, such as the huge, some might say Legendary, growth which has taken place recently in western Wyandotte County.

While the arguments for and against continuation of the pass-through exemption followed well-trodden ground, one comment in particular was distracting in its candor. Recently-appointed Secretary of Revenue, Sam Williams, kicked-off the long hearing by admitting to material flaws in the analysis his office had done of how much revenue would flow into the state’s budget if the exemption were repealed. People in the Statehouse call these kinds of analyses “Fiscal Notes.”  The Department of Revenue’s initial Fiscal Note on HB 2023 suggested the bill would raise about $178.3 million. However, Secretary Williams confessed he had just been informed the Fiscal Note has some mistakes and he expects the actual number to be higher; probably over $200 million. While that is nowhere near enough to close the budget gap, legislators understandably need to have solid facts as they assess all of their unpleasant options. Williams pledged to work over the weekend to deliver a fresh accurate Fiscal Note this week.

Legislative Update – January 17, 2017

Kansas lawmakers returned to Topeka last week and wasted no time in training their sites on one of the most controversial issues they will face:  whether to close the tax exemption for pass-through business entities. On the first full day of the 2017 session, a bill which would repeal that exemption was introduced in the House Tax Committee. A hearing on the bill is scheduled for Thursday, January 19. The urgency seems to stem from two sources. First, since the bill is retroactive to January 1, tax committee members acknowledge that, if the exemption is to be repealed, it needs to be done quickly to minimize disruption for affected businesses. Some argue the exemption should be closed next January instead to give businesses time to plan for the change. Second and probably more fundamentally, many of the legislators had their ears filled during the campaign by voters demanding the so-called “LLC Loophole” be closed. Optimistic estimates are that the bill would raise roughly $200-$250 million. By June 30, 2018, the state is projected to be somewhere between $750 million and one billion dollars underwater absent substantial changes in revenue and spending. So, repealing the exemption does not represent, in itself, a solution to the state’s budget woes. It is really more a response to the perceived unfairness of the exemption. If it is done at all, the repeal needs to be handled very carefully. One missed proviso in a hastily written law could have costly unintended consequences. Suffice it to say, businesses owners and their Chambers all across the State will be watching this bill closely.

Brownback Budget Plan

Governor Brownback delivered his State of the State address on January 10, renewing his commitment to the tax plan he helped engineer in 2012 to stimulate job growth and signaling that he remains firmly opposed to expanding the state’s Medicaid program called KanCare. The following morning, the Governor’s staff briefed legislators on his budget plan for the remainder of this year and for 2018 and 2019. To close the $350 million budget shortfall this fiscal year, the Governor mainly proposes to borrow about $317 million from various state agencies’ idle funds and pay them back over the next seven years. He also plans to take money from the unclaimed property fund, complete the sale of the Kansas Bioscience Authority and cut roughly $86 million from payments to the state’s retirement system. The Governor’s budget would also hold-off on paying about $86 million to schools until July; thus pushing that expenditure into the next fiscal year.

For Fiscal Years 2018 and 2019 (i.e. starting on July 1, 2017), the Governor proposes to sell Kansas’ right to receive annual payments from the tobacco settlement fund for the next 30 years in exchange for about $530 million now. He also plans to tax passive income (for example on rents and royalties), to raise the annual filing fee for business owners from $40 to $200 and to impose a $1.00 per pack tax on cigarette sales. He would double the tax on other tobacco products and alcohol, too. The Governor would also hold the lowest Kansas income tax rate at 2.7% instead it allowing it to slip down to 2.6% as it is currently scheduled to do. To reduce government spending, the Governor plans to require all of the state’s school districts to join a single health insurance plan, among various other efforts to make state government more efficient. The budget includes shifting a total of about $580 million of motor fuels sales tax revenues over the next two years from the Kansas Department of Transportation to the state’s general fund. Brownback does propose some spending increases, importantly including restoration of the 4% cut to providers of health care to the poor. He also plans to spend $9 million over the next two years on scholarships for teachers who go to work in rural areas. Now the relevant committees in the House and the Senate will get to work dissecting the Governor’s plan and trying to build a budget with which a majority of them can agree.

Other Early Legislation

The LLC bill and the budget bill are the center of attention but of additional interest is a bill to expand KanCare which was introduced last Friday. While the Governor shows no inclination to approve such legislation, hopes are high that the issue will at least receive a hearing this session. Bills to reinstate the Kansas enterprise zone act and create a joint committee on economic development are also worth watching. A big week one.