Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
By Jason Mast
University of Kansas men’s basketball coach Bill Self made headlines in 2016 when it emerged he had used a loophole in the 2012 Kansas tax cuts to avoid paying state taxes on 80 percent of his salary. Now, a hefty bill will soon be due.
The 2012 cuts, which Gov. Sam Brownback (R) billed as a pro-business conservative experiment for the nation and which the Legislature just ended this summer, reduced the state tax on passthrough businesses to zero. But passthroughs are so named because the profits are “passed through” to the owners, who then pay income taxes on it. By exempting income from passthroughs from taxation, the state opened the door for people to set up an LLC or S corporation, have their employer pay that business, and then collect the money tax-free.
Self appeared to do exactly that. Brownback signed the tax cuts on May 23, 2012. On July 18 of that year, Self’s attorney, Stuart Campbell, filed articles of incorporation for a limited liability company called BCLT II. On Aug. 29, Self signed a contract extension with Kansas that paid him $230,000 per year—and his LLC $2.75 million.
Without accounting for any possible deductions or credits, the coach behind Kansas’s 2008 NCAA championship and the state’s highest-paid employee likely paid around $10,985 in state taxes in 2013, $10,725 in 2014, and $10,295 in 2015 and 2016. Without the exemption, he would have owed at least $130,000 in each of those years.
The number of Kansans who used a passthrough strictly to avoid taxes is disputed, but other Kansas coaches, at least, benefited from the exemption.
Kansas pays its football head coach David Beaty $575,000 of his salary through an LLC. Kansas State University paid its basketball coach, Bill Snyder, $1.22 million in 2016 through an LLC for using his name and likeness.
But those contractual arrangements are going to be less beneficial going forward. Facing an almost billion-dollar shortfall in June, the state Legislature voted to override Brownback’s veto, kill the passthrough exemption, and raise tax rates.
“They’re just now going to go back to being regular taxpayers,” said Richard Auxier, a research associate at the left-leaning Urban Institute’s Tax Policy Center, of individuals like Self.
Campbell didn’t immediately respond to a request for comment.
Lawmakers told Bloomberg BNA that individual wealthy people who took advantage weren’t the focus of the repeal effort.
“I don’t specifically remember a discussion of it,” said Jeff King (R), a leading critic of the tax during his time in Kansas Senate from 2011 to 2017. “The general theme was tax fairness, that the corporate structure that someone has shouldn’t allow them to escape income taxes.”
Nevertheless, new taxes from Self and others will be a boon to the state and to Self’s employer, the University of Kansas. As the tax cuts crippled state coffers, Kansas cut higher education continually to balance the budget.
Self will now likely be on the hook for around $150,000 in state taxes in 2017 (the tax hikes are retroactive to Jan. 1) and just under $170,000 in 2018 and thereafter.
Self maximized his earnings through the passthrough exemption, but he may have been an anomaly.
In the first years of the tax cuts, it appeared the exemption had spurred thousands of people to create LLCs. But it was a math error.
The governor’s office had given out factually inaccurate data in 2012 saying there were about 191,000 passthrough businesses in the state, said Michael Mazerov senior fellow at the liberal Center for Budget and Policy Priorities. When later IRS data later came out showing more than 300,000 passthroughs, it appeared there had been a massive Self-style surge. In reality, the governor originally had left out farms, among other entities, from his total.
It was “just blatant error in the initial reporting,” Mazerov said.
According to congressional testimony by the conservative-leaning Tax Foundation, few who hadn’t formerly filed on passthrough forms did so after the tax cuts, “Kansans who already reported income on those forms increased how much they were reporting and created new Kansas business entities with the Secretary of State.”
“While decreasing taxes is generally associated with greater economic growth, the pass-through carve out is primarily incentivizing tax avoidance, not job creation,” the foundation’s Scott Drenkard and Joseph Henchman said.
The bulk of studies show the main ways people avoided taxes under the exemption were by changing from employees to independent contractors, Mazerov said, despite rendering the same services and shifting income from wages to profits.
He alleged some conservatives advocating supply-side economics have exaggerated the amount of tax evasion.
“They’re citing this tax planning as a reason why the lessons of Kansas on supply-side economics should be ignored,” Mazerov said. “In part, this is exaggerated.”
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