Welcome to Kansas, land of representation without taxation.
For the lucky ones.
According to news reports this week, Gov. Sam Brownback and the Legislature missed badly on their projections of how many Kansans would benefit from the 2012 law that allows owners and partners of certain types of businesses to quit paying state income taxes on their profits.
Back then, officials estimated 191,000 persons would receive an exemption, costing the state $160 million a year. These are people who structure their businesses to have the profits “pass through” and be declared as personal income for tax purposes. Sole proprietorships qualify, but so do larger businesses like law and accounting firms, real estate companies and gas exploration firms.
Now it turns out 280,737 tax filers used the exemption in 2013. So did 53,055 farmers apparently overlooked in the original calculation. So the number of tax-exempt Kansans has climbed to more than 333,000, and the state is losing out on $207 million in tax revenues.
The Brownback administration has been cranking out news releases this week trying to portray the larger number as good news. The 2013 numbers include more than 8,666 first-time small-business filers, officials said. Increased business activity! More jobs! The plan is working!
The shocking increase in tax-exempt Kansans has a lot to do with creative accounting. While some of the filers look like new businesses, many are actually old businesses, or their employees, reorganized to take advantage of the tax break.
The Tax Foundation, which leans to the conservative side, warned about this back in 2012.
“The exemption creates an incentive for businesses to structure as pass-throughs for tax reasons, even if it might be unwise to do so for non-tax reasons,” it said in an analysis. “Instead of the Kansas tax system treating similar activity similarly, the system will encourage economically inefficient, though tax-reducing, activities.”
If you live in Kansas you probably know someone who has been exempted. It may be your neighbor, living in the same kind of house, sending the kids to the same schools as you do but getting a free pass on taxes while you don’t.
Not all of the exempted are thrilled.
Larry Weigel works as a sole proprietor financial adviser in Manhattan, sharing office space with owners of other businesses organized as pass throughs.
Weigel, a politically active moderate Republican, explained his situation in an email: “My high-income nonbusiness owner clients paid state income taxes in 2013 totaling $8,000 to $10,000 while I and 333,000 other Kansans paid none,” he said. “My office assistant and all of our wage earners in the office paid more tax than any of the business owners in our company, and that is just wrong.”
Weigel said he has no plans to hire anyone.
“You don’t hire because of taxes,” he said. “You hire when your business grows.”
Brownback had promised in 2012 that the tax breaks would cause Kansas to “hit the accelerator” on job creation. But job growth has trailed the national average over Brownback’s first four years in office.
Meanwhile, the Legislature has been staring down at the budget crater created by the tax exemptions. Can they take more from the highway fund? Do away with the Parents as Teachers program? Get Kansans to pay more for cigarettes?
The remedy almost nobody is talking about is the obvious, inevitable one. Brownback and the Legislature made a terrible mistake in 2012 when they created a special class of tax-exempt Kansans under a false expectation that job growth would follow.
They need to bite the bullet, return fairness to state tax laws and undo the harm they have done.