Need to repeal tax exemption

The majority of Kansans want the state to repeal its tax exemption on pass-through business income. So do many businesses – including Koch Industries.

Will lawmakers get their act together and do it? Likely, though that’s still unclear.

And if they do pass such a measure, would Gov. Sam Brownback sign it? So far that seems unlikely, as Brownback continues to claim that the exemption is a success.

A signature element of Brownback’s tax cuts was an exemption on income from LLCs, subchapter S corporations and other businesses in which profits pass through to owners. The exemption ended up benefiting about 330,000 Kansans and costing the state about $250 million a year in tax revenue.

Not only has the tax exemption failed to trigger the “shot of adrenaline” that Brownback promised, many Kansans complain that it is unfair to people whose salaries are taxed. Also, though the exemption was pitched as a boost to smaller businesses, 40 percent of the overall tax savings goes to business owners who make $500,000 or more a year.

It’s no wonder 61 percent of Kansans want the exemption repealed, according to a recent survey by Fort Hays State University.

Many business owners and executives also question the fairness of the tax policy.

Steve Feilmeier, chief financial officer and executive vice president at Koch Industries, said recently that Koch didn’t lobby for the tax exemption and does not support Brownback’s efforts to preserve it.

“There needs to be more equality in how the tax gets applied,” Feilmeier said. “You can’t have half the state exempt and the other half not exempt.”

Feilmeier also emphasized the need to fix the state’s “spending problem.” Additional spending cuts, along with more tax revenue, will be needed to plug the state budget shortfall, which is estimated at about $900 million over the next 18 months.

Though a majority of lawmakers appear to support repealing the exemption, it is unclear if or when they might do so. Some Republicans want to repeal it as quickly as possible, capitalizing on the momentum of the past election and enabling the repeal to apply retroactively to the 2017 tax year. But some Democrats want the repeal to be part of a larger tax reform package, noting that repealing the exemption won’t be enough to solve the state’s revenue shortfall.

Brownback is fighting against a repeal. He spent part of his State of the State address defending the exemption, saying the “policy has worked.” But his budget plan did propose adjusting the law so that passive rental and royalty income would be taxed. Last week he indicated a willingness to accept other changes, such as possibly capping the amount of income that would be tax exempt.

But if the public, business leaders and the Legislature want a repeal, how could our governor oppose them?

This story was originally published January 22, 2017 at 5:05 AM with the headline "Need to repeal tax exemption."