Jonathan Shorman
January 19, 2017 

Proponents and opponents of Kansas’ business tax exemptions met Thursday on the legislative battlefield for the first time in the new session.

Their encounter will likely not be the last.

A host of lawmakers garnered votes this fall by campaigning against the state’s exemptions for limited liability companies, called the LLC loophole by opponents. In one of the first major hearings of the session, critics and supporters fought over the effectiveness of the policy and the price the state has paid.

At stake is the future of House Bill 2023, which would repeal the policy. The House Tax Committee must decide whether to advance the bill, change it or kill it.

Kansas Revenue Secretary Sam Williams defended the law, saying a downturn in certain parts of the state’s economy had led to revenue shortfalls. He argued the tax policy isn’t too blame.

“I would agree we have a structural problem and I would agree we have a spending problem and I would agree we have a revenue problem,” Williams said.

Williams sought to credit the tax policy for economic activity and business gains on the Kansas side of the Kansas City metro area. That drew a rebuke from Rep. Kathy Wolfe Moore, a Kansas City Democrat. Factors such as specific individuals and other policies, like tax credits, contributed to the growth, she argued.

“I would submit to you that wasn’t because of the tax cuts,” Wolfe Moore said.

Gov. Sam Brownback is seeking to preserve the provision and has mounted a more aggressive campaign in favor of the policy in recent weeks, culminating in the rollout of his budget proposal last week. The governor’s budget plan largely keeps the policy in place and only reinstates taxes on passive income from rents and royalties.

Earlier this week, Brownback said the heart of the policy needs to be maintained.

But the state faces a budget shortfall of more than $340 million in the current fiscal year, and more than $500 million next year. Those seeking to repeal the policy point to the state’s fiscal situation. Estimates suggest eliminating the exemption could net the state upwards of $250 million annually.

Opponents of the policy argue the LLC policy is unfair because it allows business owners to take un-taxed income while their employees pay income taxes.

Mark Hutton, a former Republican representative from Wichita, questioned whether the extra cash businesses have because of the policy has generated jobs. He said he had gone from a supporter of the policy to an opponent.

“This policy prepays for something we may never receive,” Hutton said.

Lona Duvall, with the Finney County Economic Development Corporation, argued in favor of the bill to repeal the policy. She indicated no business prospect had ever said the business tax policy was a factor in the decision to locate in the county.

The current policy lacks the kind of performance measures that would be expected in local tax incentives, she said.

“If I gave an incentive like that locally in my county to a business that didn’t require them to meet any pre-determined benchmarks before they got a tax incentive I would be considered reckless and irresponsible,” Duvall said.

The Kansas Chamber of Commerce urged legislators to retain the policy. In his testimony, Eric Stafford, a lobbyist for the group, said the state can find further ways to improve the government efficiency. The chamber is “extremely disappointed” to be having a tax debate again after lawmakers passed tax hikes in 2015, he said.

Julia Ward, owner of multiple businesses, acknowledged the tax cuts have been unpopular to some but said they had allowed her to expand and grow her businesses, which include a FedEx contractor and a greyhound racing operation.

“I would encourage the state to practice good fiscal policy by not only maintaining the tax cuts,” Ward said, “but also finding new revenue streams to offset budget deficits.”

Even the most generous estimates for how much revenue eliminating the LLC policy will produce are not enough to create a structurally-balanced budget. Heidi Holliday, director of the Kansas Center for Economic Growth, said the exemption should be eliminated only as part of a comprehensive tax reform plan.

“House Bill 2023 is a step in the right direction, but we implore lawmakers to hold out for a comprehensive solution,” Holliday said. “The bill on its own will only prolong a fiscal crisis that has wreaked havoc on our state economy.

Read more from the Topeka Capital Journal here.

KendraTOPEKA CAPITAL JOURNAL: Advocates and critics of LLC tax policy battle for legislative support