A House committee on Monday picked apart a proposed lucrative tax incentive for a mystery $1 billion manufacturing plant, zeroing in on a provision that appears to phase out the state’s corporate income tax and cost the state millions of dollars.
The House Commerce Committee combed through the details of the bill, questioning the general corporate tax cut, whether the incentive interfered with local government, why it was extended to the company’s suppliers and the total cost.
The nearly two-hour hearing saw lawmakers and the deputy secretary of commerce seesaw back and forth over what the bill did and what it was intended to do as they nitpicked over wording and definitions.
The Legislature is under a tight timeline to pass the legislation since the undisclosed company – except to lawmakers who signed nondisclosure agreements – is expected to choose between Kansas and another location by March.
The bill has already passed the Senate, and lawmakers in the House are trying to get the bill passed before this week ends.
“Clearly, we’ve got a lot of work to do on this,” said Republican state Rep. Sean Tarwater, chair of the House Commerce Committee.
Members of the committee questioned different facets of the bill, namely a provision that would reduce corporate income taxes by 0.5% each for year that a company benefits from the legislation.
That provision alone would cost the state an estimated $50 million each year but would continue until the corporate income tax is eliminated.
The state generated about $652 million in corporate income taxes in 2021, although it averaged about $378 million a year from 2016 to 2020.
“I think that’s just a huge can of worms that I personally cannot eat,” Democratic state Rep. Rui Xu of Westwood said of the corporate tax cut.
Throughout the hearing, lawmakers peppered Deputy Commerce Secretary Paul Hughes with questions about the tax incentive.
Hughes asked the House committee to extend the sunset in the bill from March 31, 2023, to June 30, 2027.
He also asked the committee to make the investment tax credit offered in the legislation refundable after it was removed in the Senate.
Hughes didn’t take a position on the corporate income tax provision, prompting Republican lawmakers to suggest that Democratic Gov. Laura Kelly supported the tax cut.
They were marveled by the possibility given that Kelly has been one of the sharpest critics of former Gov. Sam Brownback’s tax cuts and his nicknamed “march to zero.”
“This has a march to zero in it that the governor’s fine with to get this deal done,” Tarwater said. “You think that makes any sense at all?”
The governor’s staff was working on a response early Monday night.
At one point, Democratic state Rep. Vic Miller of Topeka asked Hughes whether the governor supported ratcheting down the corporate income tax.
“Rep. Miller, I’m the deputy secretary of commerce, I don’t speak for the governor,” Hughes said.
Miller pushed harder, saying Hughes could answer yes, no or he didn’t know.
“There’s been an implication that by your silence you have committed a position,” Miller said.
“I don’t think it’s fair. I think it’s fair to ask you the question and for you to say what you know or don’t know.”
Hughes response: “Commerce doesn’t have a position on that portion of the bill.”
Republican state Rep. Blaine Finch, who was sitting in on the committee Monday, was the first out of the box with questions about how suppliers of the manufacturing plant would benefit from the tax incentives.
The bill extends economic incentives to five suppliers of the company that sell more than $10 million worth of products to the primary project.
Finch pressed for details about the investment the suppliers would make in Kansas, something which Hughes said was not available since they haven’t been named.
“We don’t have a list of actual suppliers. We don’t have client names or projects,” Hughes said.
“It’s quite likely that the mega project has not shared their information with their suppliers,” he said.
Finch later quizzed Hughes about how the bill would affect local governments under a provision of the bill that exempts 50% of property taxes if the company locates within a federal trade zone.
Finch asked whether the legislation was intended to preclude local governments from giving another type of property tax exemption other than the one spelled out in the law.
“It’s not to preclude them, it’s to set an expectation,” Hughes said. “If the community wanted to do something, they could.
“It’s with the community’s approval to do anything as it relates to the local property tax,” he said.
“The communities ultimately have say in what, if anything, they do with their local tax.”
Finch said the legislation states that the business “shall” be exempt from 50% of the property tax, arguing that the local governments don’t have any room to maneuver under the legislation.
“This says they shall be exempt for 50%,” Finch said of the bill. “If the local government only wants to give a 25% ad valorem property tax abatement, this bill says they can’t do that. So, you are preempting local authority, correct?”
Hughes said that was not the intent.
“It probably needs to be revised then,” Finch retorted.
Questions continue to persist about the value of the incentives, which some have placed at more than $1 billion.
Tarwater asked how many of these types of projects could the state afford.
“If over the next year or five years, we contract with $20 billion worth of investment … what’s the limit?”
A new fiscal note issued on Monday didn’t make any conclusions about the cost of the incentive because fiscal analysts didn’t have enough information.
The legislation “has the potential to reduce state general fund revenues in FY 2023 and in future fiscal years, while increasing capital investment, creating high paying jobs, and establishing new and ancillary industry development in Kansas,” the fiscal note said.
“However, without knowledge of a specific incentive agreement, a precise fiscal effect of SB 347, including ancillary benefits, is not possible to formulate.”
The Commerce Department analyzed the impact of the base bill assuming a $1 billion capital investment with 1,000 new jobs and average annual wage of $51,000.
Using those parameters, the agency estimated that the incentive would cost $246 million, compared to about $144.8 million with existing incentives.
Commerce officials said that any incentive proposed for the current development prospect must be evaluated against the current incentives that are available.
Dave Trabert, CEO of Kansas Policy Institute, has been the lone opponent of the bill, criticizing the lack of transparency about the cost of the incentive.
His free-market think tank estimates that the incentive is valued at almost $1.8 billion for the primary manufacturing project, not counting the suppliers.
“This is just going to up the ante,” Trabert told the committee. “We can’t win. States like Kansas cannot win an economic war where the state with the biggest checkbook wins.”