State treasurer at public retirees rally: Income tax law may need change

State Treasurer Ron Estes fielded a pointed question about why certain Kansas business owners pay no income tax and told public retirees that lawmakers might need to revise the law.

Estes had given a rally of the Kansas Coalition of Public Retirees an overview of the state’s finances and pension system Wednesday at the Capitol. Then he asked if there were any questions.

Joan Steibal, a 72-year-old De Soto resident, stood up and asked, “Why, for example is a small-business owner not paying taxes … but everybody who works for them does?” Her question inspired massive applause from the crowd of about 150 retirees at the rally.

Steibal was referring to part of the 2012 income tax change championed by Gov. Sam Brownback that exempts the owners of certain businesses, such as limited liability corporations and s-corporations, from paying income taxes.

Estes, a Wichita Republican, told the retirees that he was surprised the bill passed in the form it did. He echoed comments the governor has made in recent weeks placing responsibility for the bill — which has been largely blamed for the state’s current budget shortfall — on the Legislature.

“I don’t think that was what he wanted,” Estes said about Brownback.

Estes said that he had engaged in conversations with some lawmakers interested in tweaking the code and offered a possible change to the crowd.

“I guess if I was describing something from scratch, probably what I would do around those same lines is that if a business makes money and they leave it in the business to reinvest it, to use for actually hiring and development, I could see the argument for that being tax-free,” Estes said. “But if that owner pulls that money out to use on their personal expenses, they should treat that as income just like the secretary or the clerk’s.”

Steibal’s deceased husband was in the public school system, so she now receives benefits from KPERS, the public pensions system. She and other rally attendees gathered in the Capitol to oppose Brownback’s decision to take $58 million from KPERS to help plug a budget deficit caused in large part by the tax cuts and to demand that he not do it again.

“I’m just horrified. It’s like a shell game,” Steibal said about Brownback shifting pension funds.

“There’s a fiscal crisis in Kansas. And it’s going to take decades to get out of. There are inequities in the tax system like this where a doctor or a lawyer who owns a practice pays no state taxes on the profits,” Steibal said. “But the secretaries, the nurses, the people who are working for them, do. Where is the fairness in that?”

Sen. Marci Francisco, D-Lawrence, who observed the rally, agreed that lawmakers need to revisit the exemption for business owners this session in the face of the state’s budget woes. A shortfall of $600 million to $700 million is forecast for the fiscal year that begins in July, even after officials close a shortfall of more than $300 million for the current fiscal year.

“One of the things that has seemed out of whack with our tax system is that we’ve said there’s a group of people – even if you think we want to be on a ‘glide path to zero’ – there’s a group of people who got there a lot faster than the rest of us,” Francisco said.

Senate Majority Leader Terry Bruce, R-Hutchinson, said lawmakers should stay the course with the exemption, which he says will show results in the long term.

“The more we hold true on that flow-through income provision, the greater benefits we see after three or five years that it’s been consistent. It’s working,” he said. “I know of businesses in my district and outside that have commented this is why they’re going to be expanded.”

Ernie Claudel, vice chair of the Kansas Coalition of Public Retirees, said after the rally that the organization’s members would meet with lawmakers to demand that KPERS not be used to plug next year’s budget hole.

Claudel said Brownback has said that he does not plan to use the pension fund again after this year. “I wish we could be totally assured that he would keep his word,” he added.

Bruce said lawmakers have a duty to uphold their obligation to public employees. He said he expected reforms this session that would strengthen the KPERS system.

This story was originally published February 4, 2015 at 1:35 PM with the headline "State treasurer at public retirees rally: Income tax law may need change."