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May 20 — Reports naming Kansas men's basketball coach Bill Self as a beneficiary of the state’s controversial income tax exemption for passthrough entities have added a new dimension to the debate over the exemption, lawmakers and analysts said.
However, they said the discussion of Self's tax returns is unlikely to have a substantial effect on the fate of the exemption, which is more tied to the composition of the state Legislature after the fall 2016 elections.
Self’s contract with the University of Kansas divides his annual compensation into two streams, a salary of $230,000 to be paid to him directly, and a $2.75 million annual payment for professional services paid to his limited liability company, BCLT II LLC.
The passthrough exemption was created as part of a 2012 tax cut package embraced by Gov. Sam Brownback (R) as one of his signature achievements. The exemption is currently claimed by more than 330,000 tax filers, a figure that far exceeds the number that was projected when the legislation was passed.
Critics estimate that the exemption costs the state about $250 million each year and argue that the exemption is one of the chief reasons that the state has missed official revenue estimates in 11 of the past 12 months, and been forced to use budget gimmicks to balance the budget.
Self’s payment arrangements shows that “large loopholes in the tax code are not a good idea,” said Sen. Jeff King (R), a member of the leadership team in the state Senate who has been part of a growing number of Republican lawmakers challenging Brownback on the passthrough exemption.
King was a co-sponsor of a bill (S.B. 508) that died during the 2016 session that would have substantially modified the exemption by treating 70 percent of income from passthrough entities as wage income subject to income taxes, and 30 percent as investment income.
King told Bloomberg BNA May 20 that he couldn’t blame Self for taking advantage of the loophole through his LLC, which Self created several years before the exemption entered the books in Kansas.
“It is certainly his right as a taxpayer to do whatever the law allows him to do to minimize his tax liability,” King said. “But it does raise a broader question of whether we should have a tax policy that allows people to avoid all state income tax.”
Rep. Steve Johnson (R), another Republican critic of the exemption, said “this is not big news to me or anyone who has been involved in the debate.”
“Coach Self is acting within the law, and it appears that he set up his LLC before 2012 and without any particular intent with regard to Kansas tax law,” he told Bloomberg BNA May 20. “But it does help to define where the erosion is occurring in the state’s tax base, and shows that the erosion is greater than what was anticipated, and is providing benefits to people with large incomes.”
Self's arrangement also draws attention to the fact that one of the central claims made in favor of the exemption—that it would promote job creation—hasn't been borne out since 2012, King said. “People who think about this case are going to realize that the payments to Self's LLC have nothing to do with job creation and are not likely to be used as capital, either.”
Annie McKay, executive director of the Kansas Center for Economic Growth, told Bloomberg BNA May 19 that KU’s routing of the bulk of Self’s compensation through his LLC was “no more alarming than many other examples that have popped up since 2012.”
“The passthrough exemption is an example of inherently flawed, bad public policy,” she said. “But we’ve known all along that this kind of thing, the claiming of the exemption by people who were not in a position to be job creators, was going to happen.”
But the Self example is probably the most high-profile case that has come to the public eye, and “could linger and reappear in the public debate when the issue re-emerges during the next Legislative session, which is very likely,” she said.
McKay also said she hoped the Self news could spur further digging into the 330,000 entities benefiting from the exemption.
“I am curious to know how many state lawmakers who have voted for this exemption have their own LLCs and are benefiting from the law,” she said. “That’s something that the public might be interested in knowing, too.”
King acknowledged that he was one of the lawmakers benefiting from the exemption.
“I have a small business that existed around six years before the law came into existence,” he said. “The exemption applies to my business as well. I wish it didn’t, I wish it didn’t apply to any entities in the state.”
Ultimately, McKay expressed skepticism that the Self revelations would have much impact.
“He’s a popular guy in the state, and people are not up in arms over this story,” she said. “And I don’t see it having a big impact on the this year's elections, either. That train has already left the station. But when the issue comes up again in the 2017 session, I wouldn’t be surprised to hear his name again.”
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