Bernie Koch: Tax bill, flaws worry business, bond raters

08/05/2012 12:00 AM

08/03/2012 7:14 PM

There were audible gasps of shock in the room packed with businesspeople as Wichita attorney Jerry Capps explained a serious technical problem in the new Kansas income-tax cut bill.

Capps, a vice president at the accounting firm of Allen, Gibbs and Houlik, explained that the legislation was really “unfinished” and had a lot of problems, including a lack of definition of “tax basis.”

Tax basis refers to the amount of investment a taxpayer has in business assets, which affects how much tax he will owe. The bill does not account for full or partial ownership changes after Jan. 1, 2013. That’s because it was passed in such haste.

For a business trying to plan for 2013 taxes, it’s like trying to build something when you don’t know what it is and you have no instructions.

Capps told the Wichita Independent Business Association that it will take legislative action to fix. In the meantime, many businesses have no idea how to plan for changes. There is speculation that the law could prevent new businesses from coming to Kansas, contrary to its intent.

Another problem: Limited liability companies are not mentioned in the bill, yet it is generally assumed they get the tax cuts.

The bill appears to eliminate deductions for mortgage interest and charitable contributions in one section, but retains them in another.

Part of the bill refers to another part of the bill that does not exist.

The Kansas Department of Revenue is trying to correct these problems by writing rules and regulations that interpret the intent of the Legislature. However, the tax-basis problem will take legislation.

Those are some of the Main Street headaches. Wall Street technicians are also worried.

Moody’s, the bond credit rating organization, had this Kansas forecast on June 13: “No improvement in economic growth as a result of the tax cuts…although improved economic growth is the legislation’s policy goal.”

The report also said: “Unless it is able to implement corresponding spending cuts or achieve faster economic growth than currently anticipated, the state forecast shows out-year operating budget deficits and depletion of fund balances, which would cause downward credit pressure.”

In a July 5 report on the economic health of Kansas, Moody’s said the biggest obstacle to the state’s economic recovery is “a shrinking public sector.”

In addition, the report said: “Prospects of additional public-sector retrenchment will remain the biggest threat to the recovery. Federal government payrolls were hit especially hard last year, with state and local employment declines not too far behind.”

Tax and spending cuts that are strategically targeted can be helpful to economic growth if they are carefully crafted. This was not.

General exhortations by candidates of the good things to come from the income-tax cut are not only premature; the opposite is beginning to be recognized by Main Street and Wall Street.

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