Gov. Laura Kelly on Friday vetoed a tax bill for the third time, saying she couldn’t return the state to an era of budget turmoil experienced in the aftermath of tax cuts enacted during former Gov. Sam Brownback’s administration.
“In order to provide sustainable funding for essential government services, we cannot return to the era of perennial, self-inflicted budget crises that undermine the very fabric and foundation of our state,” Kelly said in a two paragraph statement.
“Last year, despite COVID-19, Kansas experienced a record-setting $2.5 billion in new investment from businesses.
“These companies chose to make Kansas home in large part due to the state’s recent investments in our economic development tools, prioritizing funding for infrastructure improvements, and reinvesting in our students.”
Kelly vetoed a bill that was estimated to cost the state treasury almost $300 million over three years.
It followed two similar bills that the governor vetoed in 2019 that the Legislature couldn’t muster enough votes to overrride.
The House voted 81-43 – three votes short of a veto override – to approve this year’s tax bill. The Senate passed the bill on a 30-10 vote.
“Senate Republicans stand with the middle-class families and main-street businesses who pay the bills,” said Senate President Ty Masterson.
“We look forward to overriding the veto on their behalf when we return on May 3rd.”
The House lost several conservative Republicans on the tax bill vote – Reps. Cheryl Helmer, Trevor Jacobs and Michael Houser – who were all endorsed by the bill’s primary supporter, the Kansas Chamber of Commerce.
A fourth Republican House member – Rep. Ron Howard – was absent the day of the vote. He also was backed by the chamber.
“Sadly Governor Kelly seems confused about which administration we are living in,” House Speaker Ron Ryckman Jr., House Majority Leader Dan Hawkins and Speaker Pro Tem Blaine Finch said in a joint statement.
“She is now governor and her continued insistence on higher taxes, depriving Kansans of the benefits of federal tax cuts and increasing the tax burden on Kansas employers is the only experiment we are suffering through,” they said.
“Kansas continues to lag behind its neighbors in our economic recovery because of actions like this veto. We stand ready to take up an override vote for the good of hardworking Kansans.”
The legislation is similar in scope to the two bills that Kelly vetoed in 2019 because she said they would wreck the state budget.
The bill is different from 2019 because it applies the state sales tax to marketplace facilitators where companies such as Amazon allow third-party retailers to sell goods and services on their website.
Critics said most recent tax bill did more to benefit large multinational corporations than it did to help everyday working Kansans who wouldn’t enjoy the same benefits from the tax bill passed by the Legislature.
Kansas Action for Children praised the governor’s veto, raising the specter of how a change in the federal tax code could worsen the state’s revenue outlook even with the tax cuts.
Emily Fetsch, director of fiscal policy for KAC, pointed to a potential loss of more than $360 milion in revenue over three years because of the tax code change.
Congress decided last year that forgivable loans made under the federal Paycheck Protection Program – intended to help employers make payroll during the pandemic shutdowns -weren’t subject to income tax.
Plus businsess received the added benefit of being able to deduct expenses paid with those same loans as well.
Since Kansas is a rolling conformity state, the loans are not taxable at the state level either unless the Legislature directs otherwise.
There was an attempt in the Kansas House to bar businesses from deducting those loan expenses, but it failed.
The Internal Revenue Service initially ruled last year that the businesses could not deduct expenses paid with PPP loans.
However, Congress went the opposite route and made the expenses deductible when it passed a new COVID-19 relief bill.
The new tax bill, Fetsch said, costs too much.
“At a time when our state should be watching our revenue streams carefully, the bill hands out tax breaks to big corporations and high-income earners, among others,” she said.
“While it includes less harmful sections, the bill as a whole would set Kansas back as we work to rebuild from the COVID-19 pandemic.”
The Kansas Chamber of Commerce, a staunch supporter of the tax bill, expressed skepticism about the Kelly administration’s commitment to job creation.
“We appreciate working with Gov. Kelly where we can,” Chamber President and CEO Alan Cobb said in a statement.
“But it’s clear that there’s no serious interest in creating a climate to attract new investment for Kansans to obtain access high-quality, private sector jobs,” Cobb said.
“In baseball terms, Kansas has the best farm system in the nation,” he said.
“We train the best, brightest and most hard-working, only to lose them to free agency to states where those jobs exist.”
The bill passed by the Legislature contains many of the same provisions of the legislation from two years ago, including a measure allowing Kansans to itemize on their state income tax return if they don’t itemize on their federal return.
Fewer and fewer Kansans have been itemizing since the federal tax code changes were passed in 2017.
About 99,100 itemized in 2019 compared to about 183,300 who itemized in 2017 before federal tax reform, state figures show.
The bill also includes an exemption for income earned by foreign affiliates of U.S. companies from intangible assets such as patents, trademarks and copyrights.
The exemption for so-called global intangible low-taxed income is a controversial piece of similar legislation two years ago that the governor vetoed and Democrats have said would benefit multinational companies at the expense of working Kansans.
The federal government started taxing global intangible low-taxed income as a way of ensuring that a minimum level of foreign income tax is paid on the earnings of the foreign subsidiaries of U.S. parent companies.
Supporters of the provision argue that Kansas has not taxed foreign income previously and question why the state should collect the tax now.
The bill also provides a $500 across-the-board increase in the standard deduction for all filers.
The bill would increase the standard deduction to $3,500 for single filers, to $8,000 for married couples and to $6,000 for the head of household.
The bill also decouples from new provisions of the federal tax code that limit the amount of interest expense that can be deducted.
Under the legislation, businesses could deduct the full amount of business interest on state income tax returns, costing an estimated $30.6 million in the first year, $37.5 million in the second year and $38.6 million in the third.
The bill also includes other provisions that allow deduction of business meal expenses and allow banks to deduct their FDIC insurance premiums on their taxes.
Corporations also would not have to pay taxes on state and local tax incentives.
“This bill gives hundreds of millions of dollars to companies with by and large zero income in our state, while providing everyday Kansans two pizzas’ worth in savings,” Senate Minority Leader Dinah Sykes said in a statement.
“I think we can do better than that.”
The tax bill originated as a result of federal tax reform in 2017 and has been hotly debated each of the last two legislative sessions.
Kansas is considered a “rolling conformity” state, meaning it must conform with any changes to the federal tax code automatically unless otherwise authorized by the Legislature.
As a result, the state has started collecting taxes from some sources it hadn’t previously received revenue from in the past.
Earlier this session, Kelly signaled that she would veto any tax bill that she thought would take the state back to the era of income tax cuts enacted under former Gov. Sam Browmback.
She previously criticized an earlier variation of the bill that would have given up about $422 million in revenue, calling it “irresponsible” and “bad tax policy.”
