Kelly budget proposes tax on Netflix, Hulu, other streamers and some online merchants
Kansas Gov. Laura Kelly has revived an effort to tax digital downloads, streaming services and online purchases in a bid her budget director says would level the field for the state’s struggling brick-and-mortar stores.
The proposal is contained within the governor’s budget, which was presented to the Legislature and other stakeholders on Wednesday, the day after Kelly’s State of the State speech.
The tax would apply state sales tax to online services such as Netflix, Hulu and a host of other streaming providers. It would also apply to purchases made through online “market facilitators” such as Ebay and Etsy, who act as a go-between linking buyers in Kansas with retailers in other states.
The digital sales tax is estimated to generate $42.7 million a year for state coffers, while requiring market facilitators to collect sales tax on out-of-state purchases would generate $43.1 million for a total of $85.8 million, said Budget Director Adam Proffitt.
“These funds will be reinvested in the Kansas economy through additional resources for broadband development and other public services,” according to the budget book.
In a presentation to business organizations and other interested parties, Proffitt positioned the proposed tax as a measure to bring fairness to Kansas merchants who have to pay taxes versus online sellers who don’t, and thus can sell their goods at lower prices.
“What that does is put the local Kansas businesses at an immediate disadvantage versus online retailers,” he said. “It’s not fair to a business that chooses to invest in Kansas and has a brick-and-mortar store here and has employees here that are paying their taxes here. We need to close that loophole.”
The situation is much the same with durable goods purchased online, he said. For example, a business in Nebraska could sell to a Kansas customer through a facilitator who’s not obligated to pay Kansas sales tax, while the same merchandise purchased from a Kansas business would be taxed, he said.
“Kansas is only one of three states that has not enacted a marketplace facilitator provision,” Proffitt said.
The measure didn’t exactly get a warm reception from members of the House and Senate budget committees.
Rep. Kristey Williams, R-Augusta, questioned why projected income from the taxes is estimated to be about twice what the same proposal estimated last year.
“It just seems a little bit high, or maybe a lot high,” Williams said.
Proffitt said the presentation was based on Revenue Department estimates, which he did not immediately have access to but which he promised to provide to committee members.
Rep. Sean Tarwater, R-Stillwell, said he worried about adding another $86 million to state taxes. “Kansas is ranked almost dead last as far as our tax burden goes,” he said.
Earlier iterations of the proposal contained offsetting tax cuts, such as breaks on mortgages or taxes on out of state income, he said.
Proffitt replied that his understanding was there are no offsetting tax cuts this time around and the online tax package is a “stand-alone” proposal.
The budget envisions no increases in state personal or corporate income taxes.
Other key highlights in the budget include:
Expanding Medicaid — Kelly is proposing once again to expand the state’s KanCare Medicaid system to extend health care to the unemployed and working poor. The pool of eligible people now stands at 165,000 Kansans, officials said.
Expansion failed last year when it was blocked from coming to the Senate floor by then Senate President Susan Wagle, who linked a floor vote to House passage of an anti-abortion constitutional amendment.
Wagle’s gone, but several Democrats and moderate Republicans were unseated in the November election and this year’s Legislature is generally more conservative than last year’s, so Medicaid expansion may not have the majority support it once did.
The budget proposal contains a $19 million expenditure that would be the state’s share of the cost of Medicaid expansion for the first six months. The federal government and other rebates would pay the bulk of the cost, $541 million, Proffitt said.
Information Technology — A spike in unemployment applications during the COVID-19 pandemic overwhelmed the state’s 40-year-old computer system for handling claims.
Kelly is proposing $37.5 million for the Department of Labor to modernize the system.
She’s also proposing IT upgrades for the KPERS retirement system, $6.6 million; Office of Information Technology Services, $4.3 million; Department of Corrections, $3.1 million and Department of Human Services, $3 million.
Transportation — The governor’s budget reduces the amount of money that will be transferred from state highway funds to general government expenses.
Since 2010, governors have tapped into the Kansas Department of Transportation funding to fill budget holes every year except 2013, earning the fund the derisive nickname “Bank of KDOT.”
The allocations peaked in 2018 at $288 million, but Kelly has promised to “close the Bank of KDOT” by 2023.
This year, Kelly proposes to cut the transfer to $66.8 million, half of last year’s amount. Kelly has vowed to spend the funding for its intended purpose, to maintain and expand the state highway system, including the Eisenhower Legacy Plan, a 10-year plan passed in 2019.
Mental health — The governor proposes increasing mental health funding, including $5 million extra for mobile response and crisis stabilization, $3 million for family emergency services and $2 million for specialized services in nursing homes.
Pay raises — Kelly proposes a $14.3 million spending increase to provide 2.5 percent raises for all state employees, except legislators and other elected officials.
Kelly also proposes providing $10.4 million to the state Board of Regents. That amount is equal to a 2.5 percent raise for all employees of state universities and colleges, but the board is not required to spend it on that.
Republicans, including House Appropriations Committee Chairman Troy Waymaster, criticized the budget for including proposed actions the Legislature has rejected, such as the Netflix and Hulu tax.
“Why are we trying to resurrect components of a budget that for the most part is not going pass the Legislature?” Waymaster said.
Kelly said she expected that.
“That’s the shot off the bow because that’s where you start negotiations,” she said. “We’re here, you’re here, we need to get together.”
But she defended her budget as sound, even amid an unprecedented COVID-19 pandemic.
“It maintains investments for services like education, infrastructure and economic development,” she said. “It upholds my administration’s commitment to protecting funding for behavioral health services and includes funding for medicaid expansion. All while maintaining a very healthy ending balance.”
Contributing: Katie Bernard of the Kansas City Star and John Hanna of the Associated Press
This story was originally published January 13, 2021 at 6:11 PM.
