(Updated to reflect comments from the governor; adds cost to the state by reducing the state sales tax on food.)
The Republican-controlled Legislature barreled toward a confrontation with Democratic Gov. Laura Kelly on Friday as the House passed a tax bill giving up more than $500 million during the next three years.
The House voted 76-43 mostly along party lines to pass the bill, which includes a mix of provisions that mostly focus on returning extra revenue the state expects to collect from changes in the federal tax code. While Democrats were unified against the bill, even some Republicans supporting the bill were lukewarm.
Republican state Rep. Mark Samsel of Wellsville called for property tax relief and said the state has demands that need to be met, including roads, schools and mental health.
The bill “has some good attributes, but fails higher priorities,” Samsel said. “If these critical items are not addressed, I cannot in good conscience vote for such legislation again.”
The bill will need to go to a House-Senate conference committee to sort out the differences between their two versions of the legislation.
The House added a 1 percentage point reduction in the state’s 6.5 percent sales tax on food, which is the second highest in the country. It also tacked on an internet sales tax for companies selling at least $100,000 worth of products online into Kansas. The internet sales tax may not balance with the reduction in the food sales tax.
State Rep. Charlotte Esau of Olathe was among the Republicans who voted against the tax bill although she supported the overall idea of avoiding an unintended tax increase caused by changes in the federal tax code. She expressed concern that the addition of the Internet sales tax would lead to a tax increase.
“The amendments related to sales taxes are not coupled together and the overall impact may be increasing taxes at the very time when we are trying to avoid an unintended tax increase,” she said.
While the final bill will likely pass either chamber, it seems destined for a veto stamp since the governor has said she opposes any change in the tax code after years of revenue shortfalls blamed on the tax cuts enacted under former Gov. Sam Brownback.
Meeting with reporters during a bill signing ceremony Friday, Kelly declined to reveal whether she would veto the bill.
“I never make a decision about what I’m going to do on a bill until I’ve had a chance to read it and understand fully what’s in it,” she said.
She also wouldn’t reveal much about whether she would support the House or Senate version of the tax bill.
“I have been pretty consistent throughout the campaign and these last few months that I think we need to let the dust settle on our revenue situation,” she said.
“We have a number of critical situations across this state,” she said. “Our prisons are in dire condition. We’ve got a child welfare system that needs serious attention. We have roads that need to be built and maintained. We’ve got state employees that need to be taken care of.”
Brownback’s political ghost has been a backdrop for most of the debate over the tax bill, with Democrats warning that it would return the state to a gloomy fiscal era that left taxpayer services in shambles.
They urged rejection of the bill, calling it a corporate “give-away” and saying estimates about the cost of the tax bill are suspect. The say the bill mostly benefits the state’s multinational corporations.
“This bill spends tax revenue that we have not yet seen or collected to create a tax loophole for off-shore corporations, which have avoided Kansas tax liability for years,” said Democratic state Rep. John Carmichael of Wichita.
Republicans argued that failure to pass the legislation was tantamount to a tax increase on Kansas taxpayers who would end up paying more in state taxes because of changes in the federal tax code. One estimate provided by the Council on State Taxation indicated that corporate taxes in Kansas would increase 11 percent.
The tax bill, similar to one that died at the end of last year’s legislative session, would allow individuals to itemize on their state tax returns if they don’t itemize on their federal form.
Taxpayers are less likely to itemize on their federal returns after Congress raised the standard deduction to $24,000 for families and $12,000 for individuals.
As a result, they will have to take the less generous Kansas standard deduction, which is $7,500 for married couples and $3,000 for individuals.
Currently, about 170,000, or 14 percent, of the state’s taxpayers itemize on their taxes.
With the change in the federal tax code, that number is projected to drop to about 103,000, or 9 percent, of all taxpayers.
Here is a look at how the changes in the federal tax code will affect individual taxpayers in the context of not being able to itemize.
The bill also would decouple from the federal tax code so that multinational corporations will not be taxed on money made overseas that’s returned to the United States.
Among other things, the state wouldn’t tax income on domestic earnings and profits from foreign corporations between 1986 and 2018.
The so-called repatriation transition tax levies a one-time charge on previously untaxed, but now deemed repatriated foreign income currently in the wallets of U.S. shareholders, although at a reduced rated compared to what’s generally applied to corporate income.
The bill also would exempt global low-taxed income, something now taxed by the federal government 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.
The bill also allows banks to deduct their FDIC insurance premiums on their taxes. Corporations also would not have to pay taxes on state and local tax incentives.
Fiscal estimates show that the legislation would reduce tax collections by $209 million in 2020, $145.2 million in 2021 and $150.6 million in 2022.
The corporate portion of the bill has one of the biggest impacts, costing the state $137 million in revenue in 2020, $52 million in 2021 and $56.3 million in 2022. It totals out at $245.3 million over three years.
The itemization portion of the bill gives up about $50 million in revenue in 2020, $60 million in 2021 and $61 million in 2022. It totals $171 million over three years.
The reduction in the food sales tax costs the state an estimated $43.5 million in 2020, $66.1 million in 2021 and $67.1 million in 2022. It totals $176.7 million over three years.
