Maybe this is why Gov. Sam Brownback and many legislators so adamantly defend the state tax exemption on pass-through business income: They personally benefit from it.
Meanwhile, the state faces mounting budget shortfalls, and many Kansans question the fairness and effectiveness of the exemption.
Nearly 70 percent of Kansas lawmakers – or their spouses – own a business or property that allows them to avoid paying state tax on business income, according to research by Eagle reporter Bryan Lowry. In addition, both Brownback and his wife financially benefit from the exemption – as does the lieutenant governor, attorney general, secretary of state and insurance commissioner.
Brownback pushed through the exemption as part of his 2012 tax cuts. He argued that exempting non-wage income from limited liability corporations, limited partnerships and other pass-through entities would boost job creation.
So far, that hasn’t happened. Kansas’ job growth has lagged the nation and most of the region since the tax cuts went into effect. In fact, Kansas had 8,300 fewer jobs in August than the previous year, for a -0.6 percent growth rate.
Though Brownback pitched the exemption as helping small businesses, much of the benefit went to wealthy Kansans. Last year, less than 1 percent of business owners making more than $500,000 accounted for 40 percent of the exemption’s total cost with an average tax savings of about $38,000. Meanwhile, more than half of the business owners using the exemption made less than $25,000 and saved an average of only $158.
The tax break wasn’t enough for most small businesses to add employees. Even if it were, decisions to add employees are primarily based on demand for goods or services, not state tax policy.
Lawmakers also botched the writing of the exemption. They intended for it to apply to about 190,000 Kansans, but about 330,000 Kansans ended up qualifying, which made the exemption more costly for the state – about $200 million a year.
Many Kansans also complain that the exemption is unfair. Why should the incomes of law firm partners be exempt while the salaries of their secretaries are fully taxed? And how it is fair that two people could do the same work but only one has to pay state income taxes?
The House did attempt to revoke the exemption last session, though it failed badly. Since then, some of the biggest supporters of the exemption lost their re-election bids. And last week, 26 GOP state senators and Senate candidates released a plan arguing for “a system of taxation that is fair to all.”
The tax exemption is unfair and too costly and is not delivering the promised economic stimulus. Will lawmakers and Brownback revoke it next session, or will they put their own financial self-interests before the good of the state?