Legislature passes new $284 million tax bill

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For the third time, the Kansas Legislature is sending Democratic Gov. Laura Kelly a tax bill that came as an outgrowth of changes in the federal tax code that supporters said led to Kansans paying more in taxes.

The House and the Senate agreed on a tax bill Tuesday that could cost the state treasury almost $300 million over three years.

It was a far less expensive alternative to a similar bill that the Senate passed earlier this session costing more than $1 billion over three years.

The House voted 81-43 to approve the bill Tuesday morning while the Senate approved the legislation 30-10 later in the day.

The legislation is similar in scope to two bills that Kelly vetoed in 2019 because she said they would wreck the state budget.

Critics said the 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.

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.

Kansans are not as likely to itemize on their state return after federal tax reform in 2017 boosted the federal standard deduction to aboutt $12,400 for a single person and about $24,800 for a married couple.

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.

Since Kansas is a so-called rolling conformity state with the federal tax code, the Legislature must act not to collect the tax.

Supporters of the provision argue that Kansas has not taxed foreign income previously and question why the state should collect the tax now.

House Democrats unsuccessfully tried to remove the corporate provisions from the bill and replace it with tax cuts that would benefit the less affluent or a broader base of taxpayers.

The bill passed Tuesday 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.

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 a bill that would have given up about $422 million in revenue, calling it  “irresponsible”  and “bad tax policy.”

An official from Kelly’s communications office did not respond to a request for comment on the bill.

The new bill passed Tuesday comes closer to $300 million over three years after state sales taxes are applied to marketplace facilitators where companies such as Amazon allow third-party retailers to sell goods and services on their website.

Two year ago, Kelly vetoed a tax bill that would have given up about $239 million over three years and another that would have cost about approximately $504 million.