SB22 – Valid tax policy, or political validation?
On Thursday and Friday, the House of Representatives voted on a tax bill. Actually, we voted on a number of wildly different tax provisions, all jumbled up together in a single tax bill.
SB22 contained several significant changes to the state’s tax code, including:
- Decoupling from federal tax code, which allows individuals who don’t itemize on federal tax returns to itemize on their state returns. Current law is “coupled” to federal tax code, so if you don’t itemize on a federal return, you can’t itemize on your state return. Federal tax changes raised the standard deduction, meaning fewer people will likely itemize on federal returns. Budget impact: $50 million in the first year, moving to around $60 million a year for the next several years.
- Kansas would stop taxing deferred foreign income in tax year 2017 and beyond. Budget impact: $10.5 million the first year, $400,0000, and $200,000 in succeeding years.
- Kansas would not tax Global Intangible Low Taxed Income (GILTI) in tax year 2018 and beyond. Budget impact: $70.9 million the first year, $24.7 million and $24.2 million the next two years.
- Kansas would exempt for tax year 2018 and beyond some disallowed business interest. Budget impact: $53.1 million the first year, $25.5 million, and $30.6 million thereafter.
- Certain capital contributions for tax year 2018 and beyond would be excluded from Kansas income tax. Budget impact: negligible
- Federal Deposit Insurance Corporation premiums paid by large financial institutions would be excluded from Kansas income tax. Budget impact: $2.7 million, then $1.3 million each year.
- Kansas would reduce the state sales tax on food by one cent. Budget impact: $43.5 million, $66.1 million, and $67.1 milion in the next three years
- Would enact the Main Street Parity Act, which collects sales tax from out-of-state retailers and “marketplace facilitators” who reach $100,000 in gross sales to Kansas. Budget impact: Add $21.7 million, $33.1 and $33.7 million thereafter.
If you’re interested, here’s the bill’s supplemental note.
That’s a lot for one bill. But if we broke that apart, we’d be breaking a long standing tradition of turning relatively simple, straightforward issues into a convoluted mess.
I voted against the bill, for a number of reasons. First and foremost, if you’re counting at home, this is about a $137 million tax cut for giganti-corps, with first-year income tax savings of $50 million for individuals, $43.5 million in sales tax savings for everyone, and additional tax collections of $21.7 million from internet sales. As percentages, of the entire estimated $230.8 million in tax reductions, nearly 60 percent goes to some of the biggest corporations in the country; 21.7 percent goes to income tax relief for individuals – of which most goes to those making more than $100,000 each year; and 18.8 percent of the savings goes to Kansas sales tax payers.
It’s pretty easy to see that this was really a tax plan designed for the benefit of giant corporations, with a few crumbs of savings thrown in for actual people, just to make it more enticing. The truth is most people will continue to take the standard state deduction on income taxes – and the broadest way to bring Kansas tax code in line with federal tax code would be to increase our standard deduction. Everyone would save taxes that way.
Nationally, the average household spends $4,363 on groceries. If that holds true in Kansas, the average household can expect to save a whopping $43.63 a year on groceries if this bill becomes law (it won’t, I’ll explain later). Compare that to the enormous amount megla-corps will save on the taxes they should be paying on money previously held overseas.
The same holds true on income tax – even those in the upper tax brackets (above $250,000 per year) can expect to save around an average of $43-$45 per year. Meanwhile, these giant companies will save a lot more money, and avoid what would have been an effective tax rate as low as 1.5 percent on some of these overseas earnings. (through a complex set of formulas that reduce the amount of income that’s subject to tax).
Additional information: I talked with Minority Leader Tom Sawyer this morning to get more information about the effective tax rates these companies are trying to avoid. On Repatriated money – which has been held offshore – the federal government already allows an 80 percent reduction in the taxable income. So for this portion, which is $10.5 million in tax savings, these companies under current law would only pay 7% corporate tax on 20% of their foreign income – which is an effective tax rate of 1.4%. On the GILTI funds, Sawyer explained, the federal government allows a 50% reduction on that income – meaning the Kansas 7% tax rate only applies to half that income – an effective tax rate of 3.5%. The vote on SB22 eliminates these relatively small taxes altogether.
There are eight different components in SB22, and of those, only two offer direct tax benefit to individuals, while another increases tax revenue through collection on internet sales. The other five are designed for the biggest corporations in our state, county, even the world. I can’t be OK with that.
During the debate on SB22, Speaker Pro Tem Blaine Finch made the point that, were it not for the actions of the federal government to change its tax code, we wouldn’t be arguing this issue. That was a fair point – and one Finch delivered with his signature eloquent fashion. The federal government made a change, and it seemed prudent to adjust accordingly. I’ll just take a moment to point out that we’ve not felt that same urgency when it comes to things like Medicaid expansion – something also driven by changes in federal policy. If we wanted to, we could take a minute to evaluate what needs to be done, and how we might best move ahead.
However, the argument that we’d be at such a severe competitive disadvantage without these changes falls flat. These companies already are in Kansas because we have something to offer them besides tax policy. We have ample space, fair tax policy, a good labor force, good roads, and we’re centrally located to the nation’s distribution networks. This idea that if we don’t bend over backwards, companies will abandon their investment and infrastructure is sort of nonsense. I bet they tell all the states that, and I bet they all fall it just as easily.
On most issues that aren’t clear cut, I try to balance them on a scale of sorts. If the good outweighs the bad, I’ll likely vote for it. And vice versa. In this case, I can’t support something that is nearly 60 percent good for the biggest companies, while only providing token relief to individuals. I might have supported a number of other measures to adjust our tax code, if those adjustments resulted in more savings for more people. But between the numerous tax credits/exemptions we offer along with these tax savings, we’re give away a lot of money to big companies every year. And at the end of the day, that costs individual taxpayers more.
Now, will this become law? It has passed the Senate and the House and will now head to the Governor’s desk. The prevailing thought is this wasn’t so much about tax adjustments as it was about drawing lines in the sand with the Governor in some sort of power struggle. The common thought is that she’ll veto it. There will be an override attempt that will fail, and then there will be real conversation about some mix of tax cuts and spending initiatives.
I heard a term the other day I hadn’t heard in a long, long time: Social Compact. The idea that we, as a society, have an obligation and duty to use our wealth to build a better future. As part of that, we recognized that we’d all have to chip in and make things happen for tomorrow. It might cost us a bit, and it might take a while to see the results, but it would be for the better down the road. It’s the sort of thinking that built our highways, that created the momentum for the Rural Electrification Act, that dammed up rivers in the 50s and 60s, and fueled the WPA. It helped us understand the need to fund education and to care for the most vulnerable around us. It seems that social compact so many people before me believed in has been turned on its head when we’re going out of our way to save corporations so much money, while putting so little effort into helping the people who truly need it.
Even more so when we buy into the idea that the largest corporations among us are deserving of our charity, our pity, and our unyielding obligation to do all we can to save them money, even if doing so costs struggling families more.