Lawmakers seek to restrict sales tax revenue bonds

The Kansas Senate wants to block Gov. Sam Brownback’s administration from approving new economic development projects that cost the state sales tax revenue.

When senators approved a budget bill Thursday night, it carried an amendment that would prevent the state Department of Commerce from approving any new STAR bonds projects this and next fiscal year.

The effort is meant to keep Brownback from using STAR bonds to entice the American Royal to move into Kansas, said the lawmaker who offered the amendment, Sen. Jim Denning, R-Overland Park.

The American Royal is a 117-year-old Kansas City, Mo., event that includes horse and livestock shows, rodeos and the World Series of Barbeque.

The STAR bonds program has been used to finance the construction of tourist attractions and entertainment districts across the state, including in Wichita. It enables municipalities to use sales tax revenue to pay off the bonds. Some lawmakers say the program should be halted temporarily because of the state’s dire financial situation.

Denning, vice chair of the Senate Ways and Means Committee, said lawmakers had heard rumors for a while that the governor was seeking to lure the American Royal to Kansas.

He said he crafted the legislation after he noticed that sales tax revenue that should have been returning to state coffers after another STAR bonds project ended wasn’t being counted in revenue estimates for the next fiscal year.

“That would have been about $42 million in sales tax that should be coming to the state general fund,” Denning said. “And it wasn’t showing up in the revenue estimate, so I started inquiring with the Department of Commerce.”

“I just kept on probing and probing … and started connecting the dots,” he said. “The initial response was the $42 million is not going to come to the state, it’s going to be directed to the American Royal STAR bonds project.”

Eileen Hawley, the governor’s spokeswoman, confirmed that Brownback wants to bring the American Royal to Kansas.

“The Governor is always working on a variety of economic development projects to create jobs and grow the Kansas economy,” she said. “The American Royal is one of them.”

Denning said using STAR bonds to pay for that would be foolish.

Tax policies

Sales tax revenue in STAR bonds districts goes to pay off the bonds rather than into the state’s general fund. Denning said the state can’t spare that money right now because of the governor’s tax policies. Those include widespread income tax cuts, the elimination of income tax for some businesses and a sales tax increase that went into effect last year.

“The governor’s put us on a sales tax-consumption tax policy,” Denning said. “He’s let 300,000 business owners not pay tax on their personal income, and he’s made 3 million Kansans pay higher sales tax to accomplish that. And then we’re supposed to balance the budget on sales tax revenue.”

The House and Senate each passed budgets this past week that would leave less than $7 million in the state’s general fund at the end of the 2016 fiscal year in June. The budgets don’t include the cost of complying with the Kansas Supreme Court’s Thursday order to make education funding more equitable.

“The state has no rainy day fund, it has no ending balance, and its revenue collections are in a negative trend for the last four years, so we have very short-term needs,” Denning said. “And so we may have to pass up on a project that is worthy because we have to pay our bills.”

Denning said he doesn’t want to eliminate the STAR bonds program, but he wants to pause and restore legislative oversight. Under the current system, the Department of Commerce has the sole authority to approve or deny proposed projects.

“We have no input until we read about it in the paper,” he said.

Regional attractions

The Department of Commerce said the program is used to develop regional attractions that will spur a significant economic impact. It would not release a list of current projects when asked Friday.

“There are currently ongoing STAR Bonds projects across the state. All of these projects are in various stages of progress and are subject to privacy laws,” the agency’s spokeswoman Nicole Randall said in a statement. “Commerce therefore cannot release the names or specifics of these projects.”

The agency “has not yet determined how any current or future projects will be affected should the amendment’s language be passed and wrote into law,” Randall said.

Denning said projects that have already been approved would not be affected by his amendment.

The House budget doesn’t include a STAR bonds provision, and when lawmakers negotiate a joint budget it could be scrapped.

Wichita would not support freezing STAR bonds, said Ken Evans, strategic communications director for the city.

“The city of Wichita supports the continuation of state economic development programs. STAR bonds would be one of those programs that we currently view as a positive program overall, and so it’s something that we’d definitely want to continue if possible,” Evans said.

The city is using STAR bonds to redevelop the East Bank district near downtown and to pay for the entertainment district at K-96 and Greenwich Road.

The first phase of the K-96 project has nearly $31.6 million in bonds attached to it, Evans said.

He added that he was unaware of future STAR bonds projects actively being considered by the city.

Rep. J.R. Claeys, R-Salina, said in an e-mail that “over $110 million in private investment in downtown Salina, including a hotel, museum, field house and entertainment complex, will come grinding to a halt under this amendment.

“The senate action has consequences for economic development well outside their intended target, including my hometown,” he continued. “I will not vote for a budget that shuts down a $140 million downtown rehabilitation project in my community.”

Press ‘pause’

Denning said he thinks the program is being abused in some cases. He said a STAR bond district for a water park in Wyandotte County was expanded to include two car dealerships.

“So the developers enticed these auto dealerships to come in, and now when they sell cars the sales tax goes to pay (off) the STAR bond,” Denning said.

Pausing the program would allow for a legislative review of its effectiveness and would enable lawmakers to ensure that only worthy projects are approved, he said.

Sen. Laura Kelly, D-Topeka, agreed the program needs more oversight.

“I actually think that STAR bonds are a good idea if they’re used appropriately with very defined parameters,” said Kelly, the ranking Democrat on Ways and Means. “But clearly there’s been some hanky-panky going on, and I think it’s a good idea to push the pause button and take a look and get those parameters put back around it. And get some oversight.”

Hawley said the governor’s office would be happy to work with lawmakers to improve the program.

“It is important to carefully consider the impact of STAR bond projects as Kansas transitions from funding the government through taxes on productivity to taxes on consumption,” she said. “We are happy to work with the Legislature to make any adjustments to the program that are necessary.”

This story was originally published February 12, 2016 at 9:03 PM with the headline "Lawmakers seek to restrict sales tax revenue bonds."