TOPEKA — Republicans in the Legislature delivered a knockout punch Monday in the first round of their promised “veto override-a-rama” by securing enough votes to re-instate a tax reform bundle that includes breaks for multinational corporations.
Senate Bill 50 also raises the standard deduction for state income tax returns, and allows high earners to claim the standard deduction on federal taxes while itemizing at the state level. Another provision of the legislation extends the state sales tax to online retailers.
Republicans ignored complaints from Gov. Laura Kelly and her fellow Democrats in the Legislature, who said the proposed tax cuts would jeopardize the state’s financial viability as the economy recovers from the pandemic. The legislation is expected to reduce revenues by $300 million over three years.
Sen. Caryn Tyson, a Republican from Parker who has championed versions of the tax reform for several years, denounced the “gloom and doom” assessment by Democrats of the state’s finances.
“We are collecting more taxes in this state than we’ve ever had,” Tyson said. “In fact, I don’t think this goes far enough.”
Senators voted 30-10 to override the governor’s veto, and the House followed with an 84-39 vote — the minimum support needed for the required two-thirds majority to override.
“Senate Bill 50 is reckless, shortsighted and jeopardizes our ability to fund education and will leave Kansans on the hook for another tax cut that we can’t afford,” Kelly said. “It’s as if legislative leaders want to return to the days of budget crises, gutting transportation spending, and four-day school weeks. I’ve never met a Kansan who wants that.”
The tax exemption for corporate profits stashed offshore is expected to reduce state revenues by $24 million per year. Another component of the bill, exempting certain business interest, will reduce corporate tax collections by $30 to $38 million per year.
“These corporations are taking profits they’ve earned overseas … and for a handful of companies, we are giving them this big break,” said Rep. Jim Gartner, D-Topeka. “We’ve always taxed foreigner profits as dividends at the 20% rate. Why should we change? I don’t think it’s fair. I don’t think that particular point is reasonable.”
He said the multinational companies are still hiring and, despite threats made in earlier years, have not left the state.
“They haven’t moved out like they said — ‘Oh, if you don’t give us this break we’re going to depart Kansas,’ ” Gartner said. “I don’t think so.”
The cost of those tax cuts are offset partially by extending the state sales tax to marketplace facilitators, which will add $35 to $45 million per year in revenues. Each vendor’s first $100,000 in online sales are exempted from tax collections.
The most costly provision to the state’s bottom line — raising the state standard deduction on individual income taxes by $500 and decoupling from federal law to allow for itemizations — will cost the state general fund a little more than $100 million per year.
The itemized deductions will benefit fewer than 7% of taxpayers, mostly in the top 18% of income earners.
Sen. Jeff Longbine, an Emporia Republican, provided a hypothetical example of how the change will restore “tax fairness” to wage earners. He imagined an average family, perhaps a couple of school teachers, who pay $12,000 in mortgage expenses, $5,000 in property taxes, give $2,000 away to charities and spend $2,000 in medical bills.
Because the federal standard deduction is now $24,800 under 2017 changes in federal tax law, Longbine’s hypothetical couple hasn’t been able to itemize their $19,000 in annual write-offs for Kansas taxes. Under Senate Bill 50, the couple can now claim the federal standard deduction while itemizing on the state form, where the standard deduction for a married couple will be $8,000.
“The reality of it is this bill corrects a huge injustice to our middle income taxpayers,” Longbine said. “I know the bill’s been characterized as a tax break for the rich. It couldn’t be further from the truth.”
Senate Minority Leader Dinah Sykes raised concerns about the potential for fraud under the changes in income tax collections. Previously, the state could rely on the IRS to audit individuals who include questionable itemizations. The state has no mechanism to review all of the tax returns, Sykes said.
“Let’s have an honest conversation about how to provide tax relief for all Kansans that does not bust our budget,” Sykes said.
Rep. Adam Smith, R-Weskan, refuted claims Senate Bill 50 would return the state to tax policies passed under former Gov. Sam Brownback. The fiscal impact on the state bottom line would be about 10 times less than the notorious tax experiment that passed in 2012, Smith said.
“The governor stated this would undermine the very fabric and foundation of our state, and I could not disagree more,” Smith said. “This bill provides much-needed relief for businesses that have been doing their absolute best to take care of their customers and employees, safely and securely, during this pandemic, often at a significant cost to their bottom line.”