The new tax bill that lawmakers are working on could cost the state treasury almost $330 million in the first year, growing to more than $600 million over three years.
Estimates show that the bill would start at $329.1 million in fiscal year 2022. The price tag would be $144.6 million in fiscal year 2023 and $146.4 million in 2024.
Republican Sen. Caryn Tyson, chair of the Senate tax committee, said she expects the bill to be debated in committee next week.
She anticipates changes that will reduce the cost of the fiscal estimate.
“The fiscal note right now, we want to be prudent,” Tyson said. “I think we could be reasonable in the fiscal note, get negotiations going.”
The 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.
The legislation, for instance, would allow individuals to itemize on their state tax returns if they don’t itemize on their federal form.
Kansans are not likely to itemize on their state return after federal tax reform in 2017 boosted the federal standard deduction to $12,400 for a single person and $24,800 for a married couple. The state deduction is $3,000 for a single person and $7,500 for joint filers.
The bill expands well beyond itemization to decouple from other parts of the federal tax code, including 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 was a controverial piece of similar legislation two years ago that Gov. Laura Kelly vetoed.
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 tax exemption, under the legislation, would begin retroactively in tax year 2020.
However in the two years before 2020, global intangible low-taxed income would be treated as a foreign dividend and only 20% of the income would be taxed.
The sections of the bill focusing on itemization and global intangible low-taxed income — sometimes called GILTI — would cost $166.6 million in the first year of the bill.
However, there’s a new provision in this year’s legislation that would allow taxpayers to carry back their net operating losses as provided by tax code changes made by the so-called CARES Act to foster an easier economic recovery.
Kansas taxpayers are now allowed to carry forward net operating losses — when a business’ tax deductions exceed its taxable income — for up to 10 years.
They are currently not allowed to carry net operating losses back to previous years so they can be applied to previous returns for an immediate refund of prior taxes paid.
Under the bill, a net operating loss from tax years beginning in 2018, 2019 or 2020 could be carried back five years and carried forward indefinitely.
The carryback element of the bill would cost the state budget about $100 million in the first year and $20 million in each of the following two years.
There was no estimate of the cost of the carry-forward provision.
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 $56.1 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.
Kelly has already indicated she would not sign legislation that takes the state back to the era of former Gov. Sam Brownback’s tax cuts, which were blamed for leaving the state budget in tatters.
She already vetoed two similar bills in 2019 that she thought posed fiscal risks to the state budget.
“The Brownback tax experiment is completely unacceptable,” Kelly said at a recent news briefing with reporters.
“We know what that did to our state and can’t let that happen again,” she said.
“What the Legislature presented last year was too much and it would have really started to take us back into the Brownback era, and I couldn’t let that happen.”
Kelly said she was leaving it open to see what the Legislature sends her before declaring any tax plan off the table.
The Kansas Chamber of Commerce, the leading advocate for the tax bill, draws a distinction between this bill and what the Legislature approved in 2012 under Brownback’s leadership.
“Brownback tax cuts in 2012 lowered income tax rates in the state,” said Eric Stafford, senior director of government affairs for the Kansas chamber.
Stafford said the changes made to the federal tax code in 2017 are now taxing income that the state didn’t previously collect.
“It is intellectually lazy to say that these are Brownback tax cuts, or corporate tax cuts,” Stafford recently told the Senate tax committee.
“This has nothing to do with what the Legislature did in 2012,” he said. “This is eliminating income from the base because it should not be there in the first place.”
Kansas Action for Children has urged lawmakers not to move forward with the bill.
“Tax changes that slash revenue…are an unproven approach that would be damaging to Kansas communities at the best of economic times,” said Emily Fetsch, director of fiscal policy at Kansas Action for Children.
“Yet here we are, debating doing so during a deadly global pandemic, rampant hardship, and an uncertain economic future. Lawmakers need to do the responsible thing in 2021 and back away from these dangerous proposals,” Fetsch said in a statement.
Tyson said this week that she is considering removing the carryback component of the bill in an attempt reduce the cost of the bill. She also suggested that provisions making the bill retroactive could be removed as well.
She noted that Kansas already has a provision that allows taxpayers to carry forward.
Stafford said the chamber would be willing to consider the idea of removing the carryback provision of the bill.
“If lowering the fiscal note helps get us across the finish line, I think we’re willing to look at that,” Stafford said.
“I don’t know what level of dollars the governor would be willing to accept,” Stafford said.
“Ultimately in our view, it’s not about dollars, it’s about what money should be in the taxpayers’ pocket,” he said.
“The state should not benefit from an unintended tax increase on businesses or indivduals,” he said.