Dan Doyle is so amazed by his new status as a tax-exempt Kansan that sometimes he’ll bring it up to complete strangers.
Like at a store or the bank. He says the conversations go something like this:
“Do you pay income tax to the state of Kansas?”
“Oh yes you do.”
“No, I don’t.”
“Sam Brownback says I don’t have to.”
Doyle is a partner in an Overland Park law firm, one of about 191,000 “pass-through” businesses that are the luckiest recipients of the radical tax overhaul that Brownback and his GOP-dominated Legislature engineered three years ago.
A pass-through business is one whose income, for tax purposes, is claimed directly by the owners, rather than by a corporation. Examples include sole proprietorships, limited liability partnerships and S corporations. A one-person landscaping or graphics arts business could be a pass-through entity. So could a farm, real estate business or gas exploration firm.
Along with passing income tax cuts in 2012 and 2013 that disproportionately favor the wealthy, Brownback and the Legislature made Kansas the only state to completely exempt the owners of pass-through businesses from income taxes.
“It just amazes me,” Doyle told me. “Unless something changes I am exempt for the rest of my life. I’m making out like a bandit, and it’s completely unfair.”
Doyle figures he’ll pocket between $5,000 and $10,000 a year from the exemption. His law firm has 16 partners who all get a free pass. But lesser-paid associates, paralegals and others without an ownership stake in the firm owe state income taxes.
I asked if the partners had used their collective windfall to add jobs. Doyle said the firm had been hiring because it landed a big case, not because of the taxes.
As the months go by, and Kansas creeps ever more precariously toward the brink of a fiscal cliff, it becomes ever more astounding that anyone, even Brownback and his supply-side allies, thought it was a good idea to completely exempt nearly 200,000 businesses from state income taxes. Plenty of experts warned that the exemptions wouldn’t lead to growth. And as the state’s job numbers continue to underwhelm, it appears they were right.
Kansas now allows affluent partners of hundreds of prosperous companies to pocket 100 percent of their state income tax, with no requirement that they add jobs or give anything in return. There is reason to think that businesses set up to pay corporate income taxes are restructuring themselves as pass-throughs, which will cost the state more revenue. As an accountant told me, “Why not?”
It’s possible that the tax exemption encouraged some small, entrepreneurial firms to start up or relocate in Kansas. But many of them are engaged in specialty trades with a limited customer base. Perversely, the owners of small businesses that are looking to grow aren’t likely to benefit much from the tax exemption because they are using their profits to expand, not to pass through as income.
As the Nov. 4 election draws near, Brownback holds out small straws — a study from Creighton University in Omaha that gives Kansas an upbeat economic forecast, for instance. Give it time, he says, and jobs and people will come pouring in.
Meanwhile, school leaders are sounding alarms, bond agencies are downgrading Kansas and a lot of relatively affluent people are scratching their heads and wondering why they’re not paying state income taxes like everybody else.
I asked Doyle what he was going to do with the money he’s saving. He said he was going to Cancun. I asked if he was joking. He said he wasn’t. He’s taking his family to Mexico — courtesy of Sam Brownback’s and the Kansas Legislature’s folly.