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 First, since the bill is retroactive to January 1, tax committee members acknowledge that, if the exemption is to be repealed, it needs to be done quickly to minimize disruption for affected businesses.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.

For more information about the legislature and how the Topeka Chamber is advocating for your business, contact Curtis Sneden.

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