Kansas Session Ends Without Response to Federal Tax Changes

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By Christopher Brown

The Kansas Legislature has allowed the 2018 session to end without making changes to prevent the new federal tax law from producing tax increases for some Kansas taxpayers.

A bill (H.B. 2228) that would have spared Kansas taxpayers an estimated $100 million state tax hit resulting from federal tax code changes died in the House May 4. Lawmakers seeking to return that money to taxpayers were unable to bring along colleagues who feared changing the state code before the effects of the law had become clear.

The House vote on H.B. 2228, as amended by a conference committee, was 59-59. The Senate vote one day earlier was 21-19.

One of the key changes proposed in H.B. 2228 would have allowed Kansas taxpayers to itemize deductions on their state tax returns while simultaneously using the standard deduction on their federal returns. This change was intended to allow taxpayers to take advantage of the increase in the standard deduction under the 2017 federal tax act ( Pub. L. No. 115-97) without being forced to give up itemizing their deductions on their state returns, a change that could have increased their state tax liability.

This provision would have prevented an $84 million increase in state tax revenue, according to Rep. Steven Johnson (R), chairman of the House Taxation Committee and a member of the conference committee. But Johnson also acknowledged that the overall fiscal impact of the bill was thought to be “very unclear,” largely because of uncertainty around the fiscal impact of the federal changes it was designed to counteract. No fiscal note for the bill appeared on the Legislature’s website.

The bill also would have:

  •  accelerated the restoration to the state code of income tax deductions for medical expenses, mortgage interest, and property taxes paid;
  •  clarified that repatriated income under Section 965(a) of the Internal Revenue Code wouldn’t be taxed under the state code;
  •  exempted global intangible low-taxed income (GILTI) from state taxation for 2018; and
  •  excluded certain capital contributions from state taxation for 2018.
The House vote showed that the two chambers were “just too far apart” as to the wisdom of taking quick action in response to the federal changes, Johnson said.

House, Senate Split

“It appeared that there was no path that had enough support in both the Senate and the House,” Johnson told Bloomberg Tax May 7. “The Senate wanted to negotiate for more of a return of dollars, and the House voted against the bill because it was too much of a return of dollars. In the end, there wasn’t a path available for a big tax bill to pass.”

Johnson said that several of the proposals in the bill appeared to have enough support on their own to make it through the Legislature, but added that there wasn’t enough of a consensus about big-picture tax policy issues for a complex bill to succeed.

Hovering in the background of the debate is the fresh memory of the state’s controversial 2012 tax cuts and the fiscal turmoil they engendered, as well as the state’s still quite unsettled school-finance picture. Both of these issues have made many lawmakers wary of returning to the path of tax cuts, he said.

‘Not the Time’

Reaction in the state was split between groups seeking to protect state revenue for important budgetary priorities who applauded the defeat of the bill, and groups interested in cutting taxes who deplored the result for its effect on economic growth and the state’s business climate.

Heidi Holliday, executive director of the Kansas Center for Economic Growth, said that the end of the session was “not the time to be looking at major tax policy changes.”

“Our position is that there are many things that the Kansas Legislature should look at in terms of responding to the federal tax changes,” she told Bloomberg Tax May 4. “But this isn’t the time to do it, at the last minute, without proper debate, and without a clear idea of the cost. This is something that can wait for a year, after we’ve seen the effects of the federal tax reform.”

But Eric Stafford, vice president of governmental affairs for the Kansas Chamber of Commerce, lamented what he called a “lost opportunity to make Kansas taxpayers whole.”

“It’s unfortunate that the Legislature failed to address needed state reforms in response to the federal tax reforms,” he told Bloomberg Tax May 7.

Stafford said the chamber was particularly concerned over the Legislature’s failure to ensure that the state wouldn’t tax foreign deferred income that has been deemed repatriated under the federal changes, and said that it would explore with the state Department of Revenue the possibility of addressing the issue through regulation.

A DOR spokeswoman didn’t respond to a request for comment.

To contact the reporter on this story: Christopher Brown in St. Louis at ChrisBrown@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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