INCOME TAX REDUCTION & TAX POLICY CHANGES

The 2012 Legislative Session began with Governor Brownback advocating a tax reform plan he, members of the Administration and Legislators believe will 'jump-start' the economy. Reaction to the plan was mixed early in the session. The state's increasing revenues, indicates businesses and individuals' income is rising after devastating consequences from the national recession. This promising news on the heels of several years of business closures, scale-backs and employee layoffs, helped set the stage for tax reform debate this Legislative Session. With decreasing revenues over the last several years the state implemented substantial budget cuts, state funds were swept from one program to another and state employees were offered buy-outs or laid off. Such action kept the state from deficit spending; today the state's economy is growing but remains fragile.

The Governor's proposed tax reform plan eliminated income taxes for small businesses, reduced income tax rates for individuals and capped growth in state revenues. Details of the plan incorporated trade-offs to offset some of the significant revenue losses. The plan proposed continuing a portion (.6%) of the penny sales tax that is slated to end in July, 2013, it eliminated income tax deductions and most tax credits. It proposed capturing revenues from new oil and gas wells and reducing or eliminating some state programs for the poor and elderly. Additionally, individual income tax rates were proposed to decrease. The tax reform plan created two tax brackets rather than three. The highest rate reduced from 6.45% to 4.9% on income above $30,000; income below $30,000 the rate is 3%.

The plan was controversial; there were many moving parts with both the House and Senate preparing their own versions of a tax reform plan. Advocates for schools and those dependent on social services were vocal in their opposition. Many business and individual interests were opposed to losing long-standing deductions and tax credits; significant concerns were expressed regarding the potential loss of mortgage and charitable exemptions. Business tax elimination was limited to LLCs, Sub S and sole proprietors. Corporation's income taxes, banking privilege taxes and insurance premium taxes were not included in the plan.

Ultimately in the course of divisive debate an unexpected version the tax reduction plan was approved by the legislature and signed by the Governor. There are mixed reviews at this point; tax reform advocates believe this tax reduction plan will create significant growth in business investment and jobs. Others believe that the reduction in revenues, within such a short time, will be the basis for enormous revenue shortfalls. If the state is unable to meet its funding responsibilities, there will need to be huge budget cuts or tax increases. The largest portion of the state's General Fund is for education, then social services.

The financial publication Bloomberg warned recently that cutting income taxes may hurt the state's bond ratings. Kansas has had some of the best ratings in the United States in recent years. Moody's Investor Service, one of the biggest bond rating agencies indicated, "The outlook for Kansas is negative, in view of the state's general fund balance depletion, continued reliance on non-recurring measures, and lack of a plan to rebuild reserves, as well as significant future funding pressure from pensions, Medicaid and education."¹   This statement was made prior to the passage of the tax reduction legislation. The lower the bond rating the greater likelihood for higher borrowing costs by the state and possibly local governments and schools.

Several local chambers, including the Greater Topeka Chamber, are challenged by positioning on the tax reduction plan. The Topeka Chamber has a long-standing policy supporting a reduction in business income taxes. However, local chambers are at the forefront of attracting companies to invest new capital in Kansas and create jobs. There are many components that create an atmosphere for investment. Tax rates are one of those components, but so is the availability of quality transportation, good infrastructure to handle expanding and new facilities and their processing needs. Employers are concerned with the quality of communities in order to attract employees, they expect good schools, housing and amenities that will draw and keep employees. More than ever they are looking for attractive 24/7 communities important to young professionals and their families. Even though the recession has discouraged significant job growth, there remains competition for talent and technically trained individuals. The quality of community plays an increasing role in attracting and keeping such individuals. Lessening state revenues and increasing demands on local property taxes, local governments will be challenged for resources.

The final tax plan kept the provisions to eliminate LLC, Sub S, and Sole Proprietors income taxes. Individual income taxes were reduced as earlier stated. Most tax exemptions were reinstated but many tax credits were eliminated for the LLCs, Sub S and Sole Proprietors. The tax on new oil and gas wells remained in the bill. The portion of the penny sales tax phase-out is still in effect. Individual income tax rates are reduced as outlined above beginning in tax year 2013. Tax credits for the working poor and food tax rebates remained intact. Businesses are encouraged to work with their tax advisor and/or accountant to determine the impact the legislation will have on their business.

The approved tax plan did not include improvements to several tax reform issues which the Topeka Chamber had strongly supported. The tax committees, in other versions of tax reform plans added language to allow certain qualified international/multi-state corporations to utilize High Performance Incentive Program (HPIP) tax credits within their unitary family of companies. Additionally, there was another bill that would have reduced the threshold for accessing the HPIP tax credits to $50,000 in investment, rather than the $1 million threshold, established for five urban Kansas counties during the last legislative session. A new incentive, created by members of the Senate tax committee, would have allowed new multi-state or international unitary corporations moving into Kansas to choose to use single-factor apportionment when determining income tax liability. This was a key new incentive that would have benefited all areas of the state; however none of these tax improvements were included in the tax plan that was passed. The Promoting Employment Across Kansas (PEAK) incentive program, established a couple years ago, is an incentive offering a refund of a portion of a company's withholding over a period of years if this company agrees to invest dollars and create jobs in Kansas. With the reduction in individual income taxes, correspondingly, there will be reduced company withholding. The PEAK dollars available as an incentive to investment are reduced, impacting the incentive's effectiveness.

It is very possible this new tax policy will be revisited next year. The $250 billion loss in revenue cliff that faces Kansas with the passage of the tax plan must be addressed. Proponents of the tax plan propose the new tax plan will create 23,000 new jobs by 2020, adding new revenues to the state coffers. "Current Kansas employment in April was 1,357,100, according to the Kansas Department of Labor. An addition of 23,000 new jobs is less than 1.7% growth.

"Here's how Kansas employment grew in the five year period after the September 11th American disaster, subsequent economic downturn and the beginning of the Great Recession in 2008. Figures come from the Kansas Department of Labor web site."

"There's an increase of 66,800 jobs in the period prior to 2007-2008, or 5% growth of employment before the recession hit. An additional 23,000 jobs over the next seven years will be welcome, but compared to what Kansas has been able to do in a normal recovery,"²  it is not clear the reasons cited to approve eliminating income tax will significantly impact job growth beyond the typical increase. Also projected by the Administration, with the passage of the tax reform bill, is an increase of 35,740 new residents, or 1.24% of the Kansas population of 2,871,238. In the decade beginning in 2000, Kansas population increased by 6.1% or 164,294 individuals. Only in one year of ten, did the state's population increase less than 1.24%. The Topeka Chamber/GO Topeka will continue to work to bring jobs and new population to our community. Topeka/Shawnee County has been successful during the recession with major investment by companies located here and with new companies' investment. New jobs have been created. Efforts will continue to attract more, we are optimistic this will happen.

The availability of utilizing STAR Bonds, an important tool for large economic development projects, was extended. The Angel Investor tax credit, Community Service tax credit and Earned Income tax credit remain intact. Other tax credits were retained for C Corps. The temporary sales tax that was implemented to get the state through difficult times was not extended; it is slated to reduce by .6% July 1, 2013.

RESTRICTING GOVERNMENT FISCAL AUTHORITY

The original tax bill proposed by the Governor included a 2% cap on the growth of state revenues. The Topeka Chamber has had a long-standing policy opposing rigid fiscal caps on revenues or taxes. Although the Chamber supports efficiencies in government, particularly in controlling costs, there must be funds available for the state to operate optimally for business and citizens' welfare. K-12 and higher education funding compose over 60% of the state's general fund expenses. Quality schools and the availability of well-trained technical school and higher education graduates to fill jobs being created are critical to the growth of investment in Kansas. During the Session there were significant concern this growth cap would hinder future state funding for education at all levels. The Topeka Chamber opposed the revenue cap in the original tax reform bill and in subsequent versions that contained a cap. The Senate removed the growth cap in their deliberations on the tax reform plan. The Topeka Chamber along with other local chambers and business, education and community advocates were pleased with this action.

COMPREHENSIVE TRANSPORTATION PLAN FUNDING

The Topeka Chamber has been a supporter of transportation improvements for over 20 years. Throughout those years and the remaining years of the most recent approval of the T-Works transportation plan, your Chamber along with many other local chambers, local communities, and transportation-related companies have yearly fought raids on the dollars set aside for funding transportation projects. This session was no different. Although the Governor pledged not to raid the funds after taking some of the dollars last year to help in the state's fiscal crisis, legislators were not as committed. Early in the session, House Leadership attempted to take $351 million for tax relief. It was ultimately removed from the tax plan with heavy lobbying by chambers, businesses, the transportation community and local governments across the state. At the end of the regular Session, the House Appropriations Committee decided to slide $24 million from transportation into education funding. Later the House took another $50 million for education spending. The Senate held strong in its commitment not to raid the transportation plan. In the final budget, zero transportation funds were transferred. Topeka Senators were instrumental in making that happen. This problem will continue from year to year, particularly with a reduction in revenues collected by the state beginning in FY 2013.

AIR SERVICE

The final budget, signed by the Governor, included funding to help the Metropolitan Topeka Airport Authority attract air service similar to what has recently happened in Manhattan. A million dollars has been made available to the MTAA on the heels of Manhattan successfully utilizing two million dollars to jump-start their air service to major markets. Manhattan was able to return the $2 million to the state, from which the million was available for attracting new air service for Topeka. The Topeka Chamber assisted in efforts to achieve this goal. We hope to be able to report back to the legislature that with the state's assistance Topeka will once again see flights in and out of Forbes Field which are competitively priced. It is planned that the state funds will be turned back to the state in a few short years. The other $1 million will be returned to Manhattan to continue to attract additional air service. This effort will keep Kansas travel dollars in Kansas rather than exporting them to Missouri.

IMMIGRATION

The issue of immigration policy has been on the legislative agenda for several years. Each year there have been multiple bills offered which include mandates to force employers to use a voluntary federal employee identification program. The legislation typically included severe penalties for businesses that may have workers using fraudulent identification documents. There has been little sympathy that some Kansas industries are not able to attract enough non-immigrant workers to handle the work load, most visible in the agricultural industry but in other industry classifications as well. The Topeka Chamber believes immigration should be handled at the federal level; otherwise the country will have a patchwork of laws which companies will be required to conform with regardless of the difficulty some companies will have with locations across state lines. The Topeka Chamber is a member of a coalition of business and agricultural interests working with members of the legislature to find sensible solutions. This year the coalition offered new legislation to partner the state with the federal government to provide work authorization for identified industries with verifiable employee shortages. The bill received hearings but was not considered by the committees.

During the Veto Session, an amendment was added to the House budget bill that would have required the state to use the E-Verify federal program to check all new state employees' immigration status. It also mandated most businesses that contract with the state to use the verification program as well. Although the business community does not oppose the state mandating the use of E-Verify internally, we do have a problem with forcing businesses that contract with the state to use the program. In addition to being problematic for existing Kansas companies that contract with the state, a particular concern for the Topeka Chamber are those opportunities when we are able to attract private-sector companies to expand or move into our state/community bringing new investment and jobs. In such situations state economic development incentives may be offered. The state incentives (as do local incentives) entail state 'contracts' with such companies to assure all parties honor the incentive agreement. Should this legislation become law, companies receiving state incentives would be mandated to use E-Verify in their hiring practices. It would have been a requirement not common to other states, causing a distinct disadvantage to statewide economic development efforts. This mandate was not approved by the Senate and thus removed from the budget bill before final approval. The immigration issue will continue to engage the business and agricultural community in future legislative sessions.

REDISTRICTING

Every ten years each state is required to review Census population within the state and make changes to their U.S. House districts assuring each federal government district is equal. The same review is required for Kansas Senate, House and School Board districts. By Kansas Statute this review and redistricting is the responsibility of the Legislature. It was to be completed during the 2012 Legislative Session. Throughout the Session both Senate and House redistricting committees met to consider multiple maps for each district. Some maps were approved by the committee and offered to the respective houses for consideration. A few of the maps were accepted by their respective house but were killed when considered by the opposite house. Drawing maps became very political and certain biases colored many other issues considered by the legislature.

This is a legislative issue the Topeka Chamber has not been involved with in the past. However this year, the Chamber was drawn into the U.S. House map deliberations when the House approved a map splitting Topeka/Shawnee County between the First and Second Districts. The Chamber worked with members of the Legislative Delegation to oppose such a split. As the Session drew to an end it was evident agreement could not be reached on any maps, so redistricting was left to a three-judge federal District Court panel.

The panel released their maps on Friday, June 8, 2012. All district maps were revised by the panel, causing massive changes in the Kansas House, Senate/School Board and Congressional Districts. The deadline for filing was the following Monday, June 11, 2012 at noon. Topeka/Shawnee County remain in the 2nd District along with Lawrence/Douglas County now completely in the 2nd. However Manhattan/Riley County was shifted to the 1st District despite Legislative and Administration efforts to keep them in the 2nd. The August Primary and November General Elections will have several incumbents in new districts, districts without incumbents, districts with incumbents running against incumbents. There is a great deal of speculation as to the outcomes of the Primary and General Elections later this year. The Topeka Chamber strongly encourages the business community to become involved in campaigns with support for candidates who understand business issues. We also encourage all business representatives to vote and to encourage their employees to vote in both elections.

2012 LEGISLATIVE SESSION

The Topeka Chamber thanks those persons who communicated with legislators about the impact proposed legislation will have on their companies and business in general. It is especially helpful for legislators to understand what implications legislation has in successfully growing and retaining businesses and in creating jobs. I also want to thank the twelve members of the Shawnee County Delegation. They work tirelessly on behalf of the Topeka/Shawnee County community. Sometimes there are differing views on legislation, but individually they have been open to input from the business community. There are many issues where members of the delegation exerted their influence and exercised their vote on behalf of the Topeka/Shawnee County business community and the Topeka Chamber of Commerce.

This Legislative Session was a particularly challenging one. The changes brought on by redistricting will generate many changes in governing bodies. We welcome working with familiar faces and the fresh faces that will become our community's representatives after the elections. We hope next year will bring renewed interest in working together to find solutions to further the state of Kansas, the success of businesses and the wellbeing of citizens. Your Chamber will be there to communicate business and community interests as determined by your Greater Topeka Chamber of Commerce Board of Directors.

¹ As reported by the Kansas Economic Progress Council, May 21, 2012.

² As reported by the Kansas Economic Progress Council, May 25, 2012.

This report prepared by Christy Caldwell, Chamber vice president government relations.  For additional information contact her by email This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone, 785.234.2644.