Would planned changes to Kansas’ new income tax-cutting law lead to unconstitutional retroactive taxing?
That’s the question Wichita Sen. Jean Schodorf wants Attorney General Derek Schmidt to investigate and opine on.
In a letter to Schmidt, Schodorf said that changes several lawmakers have said they plan to make to the tax bill could result in retroactive taxing, which is unconstitutional. The tax cut law takes effect Jan. 1, and the Legislature does not start its session until Jan. 13.
Schmidt’s office has received Schodorf’s request and it is under review, said Jeff Wagaman, Schmidt’s deputy chief of staff, on Friday afternoon.
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Schodorf’s questions revolve around errors in the bill that have led accountants across the state to question how people who invest in businesses will be taxed under the new law.
The bill, approved by lawmakers after complicated and controversial negotiations earlier this year, doesn’t define how people who have invested in businesses will be taxed on gains or losses on the sale of their ownership interest or shares.
That flaw first became public during a presentation by an accountant at a Wichita Independent Business Association meeting in July. In August, Gov. Sam Brownback and other lawmakers said at a business forum in Overland Park that they hope the Legislature will quickly fix several flaws in the bill shortly after they convene in January.
The flaw, accountants say, could lead to investors having money they invested be taxed as a capital gain when they take it out. At the forum in Overland Park, Brownback said he was unsure how quickly lawmakers would fix the problem and he declined to characterize how big of a deal it might be.
Schodorf said that if changes are unconstitutional, the Legislature may not be able to fix the problem.
“If so that makes it a very big problem for the Brownback administration in terms of bringing business to Kansas,” she said.
Brownback spokeswoman Sherriene Jones-Sontag referred questions to the Department of Revenue. Department of Revenue spokeswoman Jeannine Koranda didn’t say whether the department has specifically discussed whether changes could create a constitutional issue.
“Due to the complexity of tax law, legislation sometimes requires technical amendments,” she said, noting that the department is looking into those amendments.
Schodorf voted in favor of the income tax-cutting bill, which eliminates nonwage income tax for about 191,000 businesses and lowers rates for individuals. She was among senators who said she voted for it in order to allow House and Senate negotiators to continue crafting a more responsible bill — one that would be less likely to force cuts to state programs in the future.
After the Senate approved the bill, which was projected to force hundreds of millions in budget cuts in coming years, a new plan emerged. But couldn’t generate enough support in the Senate, so the House voted for the more expensive tax cut plan and forwarded it to Brownback, who later signed it.
Schodorf said the administration’s request of several state departments – excluding education – earlier this year to produce budgets with a 10 percent reduction in spending is a sign of how state cutbacks could reduce important services for children and others in need.
Schodorf is also questioning whether eliminating additional tax credits and exemptions or adjusting rates upward on 2013 taxes, which some believe lawmakers will try to do next year, would create an unconstitutional retroactive tax increase.
Schodorf, who lost to Wichita City Council member Michael O’Donnell in the August Republican primary and has since said she is leaving the party, also asked if the bill’s errors are significant enough that the exemption of nonwage business income can’t be implemented without more legislative action.
“I realize that this may be difficult, but I think the question needs to be raised,” she said in the letter.