TOPEKA — The Legislature’s bill slashing state income taxes sent to Gov. Laura Kelly allows businesses accepting $5 billion in federal Paycheck Protection Program loans to “double dip” by avoiding payment of income tax on the emergency aid and by claiming state income tax deductions on the loans amounting to $359.9 million.
Bottom line in Kansas: The state’s general fund could take a massive hit over a three-year period as corporate and individual PPP borrowers take advantage of the emergency federal COVID-19 loans and follow that by claiming the unusual state tax break.
“States all over the country are grappling with this issue as well,” said Mark Burghart, secretary at the Kansas Department of Revenue. “Not only in estimating the impact, but attempts to address the impact.”
It’s not clear legislators were fully aware of financial implications of the PPP tax deduction before sending Kelly the bill lowering state income tax revenue by $285 million and while proceeding with rival budget plans that would spend more next fiscal year than was appropriated in the current year.
However, the House did soundly defeat an amendment to Senate Bill 50 that would have forbidden PPP borrowers from claiming a tax deduction from the state.
Rep. Jim Gartner, a Topeka Democrat, offered the amendment and warned colleagues the financial impact of the double-dip on the state treasury could range from $300 million to $400 million. While pitching the amendment to the full House last week, Gardner said an accountant who outlined details of the PPP program for tax committee members in the House raised the prospect of businesses double dipping.
“Hopefully,” Gartner said, “you understand what we’re dealing with here.”
The Republican-led House, at the urging of tax committee chairman Adam Smith, voted 41-81 to disregard Gartner’s recommendation.
Smith, a Weskan Republican, said it was unclear how many Kansas businesses would be eligible for the state tax deduction tied to PPP loans. He said the tax committee discussed the issue, but became bogged down in confusion about the anticipated financial impact of the deduction.
And, he said, it didn’t really matter.
“I don’t feel we should place that burden, whatever that burden is, on the backs of businesses of this state,” Smith said. “If we don’t want to allow the deductions, that’s the same as taxing the income. Essentially, the government is trying to throw a touchdown pass to small businesses and we’re (with the amendment) trying to intercept that.”
House Minority Leader Tom Sawyer, D-Wichita, said the Gardner amendment would have declared PPP loans not taxable by the state in compliance with federal COVID-19 pandemic relief law. However, he said, the amendment would not permit Kansas businesses that benefitted from forgivable PPP loans to claim an unearned state tax deduction.
Getting the memo
A memorandum outlining the potential $359.9 million subtraction from the state’s revenue stream was disclosed Tuesday to the House speaker, Senate president, Democratic leaders in both chambers and the tax committee chairs of the Senate and House. It was sent by Burghart and Adam Proffitt, the state budget director, after the House approved the income tax reform bill 81-43 and the Senate concurred on a vote of 30-10. Kelly hasn’t said whether she would sign or veto the bill.
Rep. Paul Waggoner, R-Hutchinson, was among representatives voting for Senate Bill 50. He argued the bill justifiably lowered the tax burden on businesses and made the state “economically competitive with other states in the Midwest.”
“Good tax policy matters,” he said.
However, Senate Minority Leader Dinah Sykes, D-Lenexa, said the Legislature had an obligation to be fiscally responsible as the state recovered from the pandemic. Reality of a $359.9 million deletion from the state general fund to meet PPP tax deductions affirms the necessity to be cautious, she said.
“There have been unanticipated costs for our businesses, workers and state, and as we continue to navigate the uncertainty, we need to be nimble,” Sykes said. “Policies like tax cuts for multinational corporations — the priority for extremists in the Senate — will hurt our ability to keep our budget balanced as we help hard-working Kansans recover.”
PPP nuts and bolts
The PPP loan program was part of the Coronavirus Aid, Relief and Economic Security, or CARES, Act.
Congress intended PPP loans to be forgiven if businesses used the cash for payroll and other specific purposes related to distruptions tied to COVID-19. Congress decided PPP loans forgiven by the federal government wouldn’t be considered income when calculating federal income tax. In December, Congress also declared tax filers could deduct on federal tax returns the expenses paid in conjunction with PPP loans.
Kansas tax law has been crafted to generally mirror federal tax law, meaning the state Department of Revenue would be expected to allow PPP loan expense deductions on state income tax returns unless told otherwise by the Legislature.
That’s why the revenue department came up with an estimate of losses to the state general fund of $193.3 million on corporate income tax revenue and $166.5 million on individual income tax revenue. The deductions in state revenue are expected to be felt in the current and next two fiscal years.
“Another disappointing piece of news,” said Steve Morris, a former Kansas Senate president and co-chairman of the governor’s advisory tax council. “That’s a major hit to the general fund.”
The revenue department’s estimate of PPP loan deductions will be evaluated April 20 by the state’s Consensus Revenue Estimating Group, which meets twice a year to adjust projections relied upon by governors and legislators to put final touches on the budget for state government.
Solid revenue report
In March, Kansas outperformed the estimate for state tax revenue for the month by $52.3 million. Total tax collections of $590.1 million were $66.7 million more than in March 2020, when the pandemic started tearing the fabric of Kansas’ economy.
Corporate income taxes paid to the state were 26% higher than anticipated for March, while individual income tax collections were about 2% lower than projected. One explanation for the drop was the state and federal governments extended the income tax filing deadline to May 17, and the state has yet to receive about 200,000 tax returns from 2020.
The state’s retail sales tax and compensating use tax collections surpassed projections by more than $20 million in March.
In a statement, Kelly said revenue growth in Kansas was encouraging. The governor also urged legislators to be practical until gaining a better picture of how federal and state tax legislation would influence the state’s fiscal year ending balance.
“We cannot risk passing any tax bill that would put Kansas back into a self-inflicted budget crisis, and jeopardize our COVID-19 recovery efforts,” Kelly said.
She was referencing budget problems created in 2012 and 2013 when the Legislature and then-Gov. Sam Brownback aggressively reduced income taxes. The sudden drop in tax revenue led to record borrowing, cuts to core government services and raids on funding for the Kansas Department of Transportation.
In 2017, over Brownback’s objection, the Republican-led House and Senate repealed much of his “experiment” in income tax policy.