It's Halftime at the Kasnas Legislature

02-25-19

Hello from Topeka!  We are at halftime of the 2019 Kansas Legislative session. At the time I am writing this column, we have a few days of being on the floor debating and voting on many bills, then those that pass will move to the Senate and vice-versa.  While we have not had a huge number of bills, we are at the point in the session where some important topics are being worked on. 

On Friday, the House unanimously approved SB9, 117-0, that would pay $115 million of what is owed to Kansas Public Employee Retirement System of KPERS.  Some of the highlights of the bill include: 1)  Meet the actuarial required payment (ARC).  This will be the first time this has occurred in 25 years.  2)  Increase the school group’s funding ratio, which is hovering too near critical status.  The school group has the lowest funded ratio currently at 61.6%, which is close to the critical code red status of funded ratio of 60% or lower. 3)     The overall funded ratio of 70%, a milestone accomplishment. 4) KPERS states that postponing the payment costs $630K monthly or approximately $20K/day.    While Governor Kelly was not pleased with this bill, every Republican, Democrat and Independent voted in favor of the legislation.  It is assumed this will be the first bill she will sign as Governor.  

We have been busy in taxation committee. Last Monday, a hearing was held on HB 2261, which would reduce the state sales tax rate on food from 6.50% to 5.50%.  The fiscal note from the Division of the Budget noted that the state’s revenues would decrease by $50 million for FY 2020, and roughly $55 million for FY 2021 and beyond.  It is estimated that the cost to implement modifications to the sales tax system would be $2.8 per year and would require six full time employees in addition.  Because 16.154% of the total state sales tax revenue is devoted to the State Highway Fund, the fund would decrease by approximately $11 million per year. Proponent testimonials primarily focused on the fact that the state sales tax rate (6.50%) and local sales tax rates are applied to groceries results in tax up to 11% on food in some areas of the state.  Any reduction of the sales tax rate on food would provide financial relief on all Kansas families, and would chiefly assist low income households.  Additionally, some proponents drew attention to food deserts and how a high rate of sales tax on food hurts rural grocers.  Opponents to lowering the food sales tax asserted that low income families would stand to benefit greater with a lower sales tax rate in general, rather than a reduction specifically on food.  It was also argued that the bill ought to be more inclusive of other items such as candy, which is excluded from the bill’s provisions.  It was also noted that some states pick and choose which foods and food products may be excluded from a lower sales tax rate, such as candy and soda.  Per the Tax Foundation’s report Sales Tax on Soda, Candy, and Groceries, 2018, 38 states and the District of Columbia fully or partially exempt food sales tax, and 62% of those states exclude either candy or soda from that exemption.  While I have been a strong advocate for reducing sales tax on food, I continue to believe we need to make meaningful reform and a 1 percent decrease, while helpful, seems more like politics that real relief for individuals and families in Kansas.

The other big issue has been SB 22. This is a bill that would make several changes to Kansas income tax provisions in response to changes to the federal tax code in 2017.  The bill would decouple state and federal tax codes from changes made in the 2017 tax cuts and allow Kansans to itemize deductions on their state returns when using the standard deduction on their federal returns.

On the first day of testimony, the committee concentrated on the individual components of the bill.  The Olathe Chamber of Commerce, the Overland Park Chamber of Commerce, and the Regional Wichita Chamber of Commerce, the National Federation of Independent Businesses, the Kansas Realtors Association, the Kansas Chamber and several other organizations voiced their support for this bill.  They stated that decoupling from the federal tax code would allow individuals and businesses to be protected from an unfair tax increase.  This would be a tax increase if no remedy is made at the state level, a tax increase that some Kansans cannot afford.

Opponent testimony included the Kansas Center for Economic Growth, Kansas Interfaith Action, the Mainstream Coalition, and the Kansas Appleseed Center for Law and Justice.  The opponents asserted that SB 22 proposes a huge new tax experiment that Kansas cannot afford.  It was stated that the bill is not revenue-neutral and would solely favor multinational corporations.

On the second day of testimony, the committee focused on the corporation components of SB 22.  The committee heard from Brian Hamer, counsel at the Multistate Tax Commission and Michael Hale, Kansas Department of Revenue on what is happening in other states.  In addition, the committee reviewed the Global Intangible Low-Taxed Income (GILTI) information provided by the Tax Foundation on January 28.  From testimony, GILTI is a guardrail, “intended to tax what are deemed the supernormal returns of foreign subsidiaries, less a deduction, less a calculated partial credit for foreign taxes paid.”  GILTI would help curb international tax avoidance techniques like profit shifting to low-tax countries.

During the hearing, the committee heard from proponents Eric Stafford (Kansas Chamber), David Rankin (Seaboard), and Alex Orel (Kansas Bankers Association).  Stafford’s testimony was the for businesses, conformity without modification results in a significant tax increase and that Kansas should decouple from the federal corporate income provisions.  Rankin also supports decoupling, which would prevent the state from taxing foreign income that historically has not been taxed.  Orel’s testimony centered on the FDIC premiums income tax modifications.  Orel supports the bill, which treats all financial institutions the same, rather than how the federal tax reform treats them (eliminated the ability of certain financial institutions to deduct the costs of their FDIC premiums).  The Bankers Association is asking for Kansas to reinstate the full deductibility of this cost.

Additional written testimony notes that without SB 22, Kansas businesses will pay more in Kansas taxes.  Passage of the ill, would “ensure Kansas remains competitive internationally as well as competitive with other states” (Century Link testimony).  Other considerations raised where that taxing foreign source income raises serious legal and policy issues, likely to be challenged in court.  Most states do not tax this income.  If Kansas were to tax, it would place businesses at a competitive disadvantage with other states (Cargill testimony). We will take action on this bill soon.

I was happy to welcome legislative pages from Palco this week: Samantha Clark, Luke Voss and Austin Stohs, they were accompanied by Shawn Clark.  Also on Friday, Commerce Secretary David Tolland and a group from Ellis County toured portions of the city and learned more about a proposed project to work on the Highway 183 by-pass north of Interstate 70.  Representative Wassinger and I were pleased to host the secretary and representatives from the Department of Transportation along with Congressman Dr. Roger Marshall.

We are having town hall meetings in the 110th District on Friday:  8:00-9:00 a.m. at the Ellis Pubic Library; 9:45-10:45 a.m. at the Stockton City Building; 11:15-12:15 a.m. Branding Iron II in Phillipsburg; 1:30 -2:;30 p.m. Norton Public Library and 3:15-4:15 p.m. at the Graham County Courthouse in Hill City.