Tim Jones
January 20, 2016

Investment adviser Brad Stratton didn’t pay Kansas any income taxes last year. He doesn’t feel good about that.

Stratton, who runs Overland Park Wealth Management LLC in Overland Park, is among hundreds of thousands of taxpayers who’ve been exempt from the state levy since 2012 because they’re considered small businesses. As a group, they’re contributing to a budget crisis Kansas can’t seem to escape.

Officials estimated 191,000 taxpayers would be eligible for the break, which the administration of Republican Governor Sam Brownback designed to spur job creation. Instead, in 2013, more than 330,000 self-employed filers — lawyers, accountants, architects, even farmers — took advantage of it, according to the Kansas Revenue Department.

“When people figured out they could create a business and filter their income through it and avoid paying taxes, who isn’t going to do that?” said state Representative Mark Hutton, a Republican from Wichita. “This is only going to get worse.”

Plugging Holes

As lawmakers get down to business in Topeka this month, the effectiveness of Kansas’s tax regime, which was re-engineered by Brownback as part of his bid to make Kansas a Tea Party showcase, remains a sore point. Budget officials forecast a shortfall of as much as $190 million, starting July 1.

Since 2013, urgent attempts to plug budget holes — increasing the sales tax, cutting education support, borrowing for pensions and raiding a fund used to maintain highways — have focused attention on an unanticipated effect of eliminating the small-business levy and installing other breaks: continuing deficits.

Brownback, who has repeatedly signaled he won’t support repealing or modifying his tax cuts, didn’t mention the budget forecast in his Jan. 12 State of the State message.

“Working together, we’ve created an economic environment that has seen Kansas gain more than 78,000 private-sector jobs,” the governor told a joint session of the legislature last week.

Surplus to Shortfall

But since the adoption of Brownback’s tax package, which included cutting the top income-tax rate by 26 percent and increasing standard deductions for married and single head-of-household filers, Kansas has gone from a $709 million surplus to shortfalls, said Duane Goossen, who served as budget director for both Republican and Democratic Kansas governors.

“It’s here we go again, again,” Goossen said.

Brownback’s goal is to eliminate the income tax entirely. Repeated fiscal crises have slowed that effort. Last year, lawmakers raised the sales tax to 6.5 percent from 6.15 percent, and boosted the cigarette levy by 50 cents a pack. They eliminated most income-tax deductions and halved property-tax and mortgage-interest deductions.

Those moves, as well as siphoning more than $400 million from the highway construction and maintenance fund since 2013, haven’t stanched the bleeding. The Revenue Department reported that December’s take was short of expectations by $26 million. Kansas budget director Shawn Sullivan said an additional $25 million will be taken from transportation funding next year.

Divided Opinion

Business associations have been divided on the tax break. The Kansas Chamber of Commerce, the largest such group, is a strong supporter, arguing that lower levies always speed job growth. At the local level, though, there is opposition.

“We certainly haven’t seen the trickle-down effect to keep it rolling through the economy. It hasn’t happened,” said Tracey Osborne, president of the Overland Park Chamber of Commerce.

Osborne said schools and roads have been hurt by declining revenue — a deterrent to economic growth.

Jason Ball, president and chief executive officer of the Hutchinson/Reno County Chamber of Commerce, said it’s premature to call the tax break a mistake. Low taxes are good for business, he said. However, the law should be re-examined because it hasn’t been a boon to job creation.

Tax ‘Fatigue’

“Is this policy creating the result we wanted it to?” Ball asked. “I think views on the success or failure of this largely depends on who you’re talking with and what their core political philosophy is. That colors perceptions, and that’s unfortunate,” Ball said.

The prospects for any change in the policy will be heavily influenced by election year politics. Kansas lawmakers will face voters in November, and Hutton — who favors repealing the small-business break and removing the state sales tax from food purchases — said he sees no political appetite for revisiting taxes before then.

“Quite frankly, there’s still a lot of fatigue from last year and just talking about taxes will get you killed,” Hutton said.

In the meantime, though, Brad Stratton has mixed feelings at best.

“The folks I employ are all paying a state income tax, and I’m not,” he said. “That’s not equitable.” As for job growth, he said, “the tax break wasn’t enough for me to hire anyone.”

Read more from Bloomberg here.

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