CHANGING KANSAS TAX POLICY

Kansas Register of Deeds Association, McPhersonJune 4, 2014

Implications of 2012-13 Tax Debate;New 2014 Legislation

Chris W. CourtwrightPrincipal Economist

FY 2012

FY 1998

FY 1992

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

inc/privsales/use

New Model: Eco Devo Emphasis

Cut, repeal income tax to create favorable tax climate;

Improve ability to compete regionally and nationally;

Be tax-friendly to stimulate economic growth, recovery

FY 2008-2014: Fiscal ChallengesGreat Recession (FY 2008-2010)

Recovery Begins (FY 2011-2012)

Sales Tax to SGF Problem (FY 2014)

Federal ARRA Spigot Shut Off

2012 Kansas Income Tax Law• Previous Individual Brackets: 3.50%; 6.25%; 6.45%• Top Bracket Repealed; Bottom Brackets Now 3.00% and 4.90%• Non-Wage Business Income of “Pass-Thrus” Totally Exempt

•(LLC’s, Sub S, Sole Props – Lines 12, 17, 18 of IRS Form 1040)• Most Revenue Offsets Proposed by Governor Not Enacted• Sales Tax Freeze, Itemized Deduction Repeal Dropped from Bill

2012 Tax Law: Fiscal Implications

Income Severance Total

FY 2013 (249.2) 18.0 (231.2)

FY 2014 (847.8) 45.0 (802.8)

FY 2015 (884.3) 60.0 (824.3)

FY 2016 (924.2) 70.0 (854.2)

FY 2017 (967.9) 75.0 (892.9)

FY 2018 (1,013.7) 80.0 (933.7)

6-yr Total $ (4,887.1) $ 348.0 $ (4,539.1)

Proj SGF Ending Balances – May ‘12

Using Gov's Recommended Expenditures and New Tax Law

($ in millions)

FY 2012 $459.4 FY 2013 $509.7 FY 2014 ($242.2)FY 2015 ($914.6)FY 2016 ($1,505.3)FY 2017 ($1,986.9)FY 2018 ($2,475.1)

New Equity IssuesEliminating Income Taxes for Pass-Thru Entities

Cutting Other Individual Inc Tax Rates Significantly

Repealing Food Sales Tax Rebate Credits

Removing Renters from Homestead Program

Receptionist in Vet’s Office Paying Taxes; Vet is Not

2013 Policy Dilemma/Tax Debate

Most of Governor’s “Pay-Fors” Left Out of 2012 Bill

How to Get a Reasonable Looking FY 14, 15 Budget Out?

Must Convince Anti-Taxers to Look Anew at Pay-Fors

Can Short-Run Taxes Sell if “Glide Path to Zero” Promised?

New Political Dynamic After 2012 Elections

“Doubling Down” on 2012 Experiment Before Results In?

Governor’s 2013 Tax Plan

Renew Proposal to Freeze Sales Tax Rate at 6.3%

Repeal Mortgage Int, Property Tax Itemized Deductions

New Round of Income Tax Rate Cuts: The Bottom Bracket of 3.0% goes to 2.5% in 2014 and to 1.9% in 2016; Top Bracket of 4.9% goes to 3.5% in 2017

If SGF Growth Exceeds 4%, Additional Rate Cuts Trigger

Governor’s 2013 Tax PlanF Note on Governor's Tax Plan

($ in millions)

FY 14 FY 15 FY 16 FY 17 FY 185-yr total

Sales/Use Rate Freeze$262.

3 $296.9 $308.0 $319.5 $331.5$1,518.

2Mortgage Interest Deduction

$162.5 $131.7 $138.3 $145.2 $152.5 $730.2

Prop Tax Deduction $68.5 $55.5 $58.3 $61.2 $64.3 $307.8

Inc Tax Rate Changes -$37.9-

$128.1-

$184.6-

$512.3

-$1,008.

0

-$1,870.

9

Total$455.

4 $356.0 $320.0 $13.6 -$459.7 $685.3

2013 Tax DebateSenate Tax Plan

FY 14 FY 15 FY 16 FY 17 FY 185-yr total

Sales/Use Rate Freeze $262.3 $296.9 $308.0 $319.5 $331.5

$1,518.2

Itemized Ded Changes $103.8 $119.7 $147.0 $232.2 $307.7 $910.4Adoption Credits -$1.5 -$1.5 -$1.6 -$1.6 -$1.7 -$7.9

Inc Tax Rate Cuts -$37.9 -$128.1 -$184.6 -$512.3

-$1,008.

0

-$1,870.

9Adjusted Basis -$8.0 -$8.0 -$8.0 -$8.0 -$8.0 -$40.0Sub S Add-Backs -$2.5 -$2.5 -$2.5 -$2.5 -$2.5 -$12.5Total $316.2 $276.5 $258.3 $27.3 -$381.0 $497.3

House Tax Plan (No to Sales Tax Freeze)

FY 14 FY 15 FY 16 FY 17 FY 185-yr total

Haircut Itemized Ded $108.3 $87.8 $92.3 $98.3 $106.2 $492.9Formulaic Rate Cuts $0.0 $0.0 -$4.7 -$28.4 -$68.0 -$101.1Total $108.3 $87.8 $87.6 $69.9 $38.2 $391.8

2013 Tax Law Adopted 6/1/2013

New Income Tax rate cuts phased in, tax years 2014-18;

Future formulaic rate relief may be triggered starting in 2019;

Most Itemized Deductions (not charitable) get a “haircut”;

Further adjustments to Standard Deductions; ROZ expanded

Non-refundable portion of Food Sales Tax Rebates restored

2013 Tax Law: Sales Tax

Sales Tax Rate = 6.15% Not 6.30%Not 5.70%

New Income Tax Brackets, 2014-18

Bottom 2013 3.00%Top 2013 4.90%Bottom 2014 2.70%Top 2014 4.80%Bottom 2015 2.70%Top 2015 4.60%Bottom 2016 2.40%Top 2016 4.60%Bottom 2017 2.30%Top 2017 4.60%Bottom 2018 2.30%Top 2018 3.90%

Itemized “Haircuts”/Standard Cut

Charitable fully retained; Gaming loss deduction repealed;

All other Itemized cut 30% retroactive to tax year 2013;

Haircut level increased to 35% in tax year 2014; 40% in tax year 2015; 45% in tax year 2016; and 50% in tax year 2017;

Standard Deduction for Head of Household (had been raised from $4,500 to $9,000) reduced to $5,500 retroactive to tax year 2013;

Standard Deduction for Married Joint (had been raised from $6,000 to $9,000) reduced to $7,500 retroactive to tax year 2013

Fiscal Impact ($ in millions)

  Sales Haircuts St Ded Rate Cuts ROZFS

RebateNet Inc

Tx Total

FY 14 $193.2   $114.6 $56.3 ($35.2) ($1.0) ($20.0) $114.7 $307.9

FY 15 $218.7   $107.4 $59.1 ($145.1) ($2.0) ($21.0) ($1.6) $217.1

FY 16 $226.9   $127.0 $62.1 ($238.3) ($3.1) ($22.1) ($74.4) $152.6

FY 17 $235.4   $148.3 $65.2 ($317.4) ($4.2) ($23.2) ($131.3) $104.1

FY 18 $244.3   $166.5 $68.4 ($459.5) $0.0 ($24.3) ($248.9) ($4.6)5 yr-total

$1,118.5   $663.8 $311.1

($1,195.5) ($10.3) ($110.5) ($341.4) $777.1

Combined Impact, 2012 & 13 Bills

S Sub HB 2117 (2012) FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 6-yr totalTotal Inc Tax Changes ($249.2) ($847.8) ($884.3) ($924.2) ($967.9) ($1,013.7) ($4,887.1)Sev Tax Changes $18.0 $45.0 $60.0 $70.0 $75.0 $80.0 $348.0 Total ($231.2) ($802.8) ($824.3) ($854.2) ($892.9) ($933.7) ($4,539.1)               HB 2059 (2013) FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 6-yr totalSales/Use Rate to 6.15% $193.2 $218.7 $226.9 $235.4 $244.3 $1,118.5 Itemized Ded Changes $114.6 $107.4 $127.0 $148.3 $166.5 $663.8 Standard Ded Changes $56.3 $59.1 $62.1 $65.2 $68.4 $311.1 Inc Tax Rate Changes ($35.2) ($145.1) ($238.3) ($317.4) ($459.5) ($1,195.5)ROZ Program ($1.0) ($2.0) ($3.1) ($4.2) $0.0 ($10.3)Food Sales Rebates ($20.0) ($21.0) ($22.1) ($23.2) ($24.3) ($110.5)Total $307.9 $217.1 $152.6 $104.1 ($4.6) $777.1

Combined Both Bills ($231.2) ($494.9) ($607.2) ($701.7) ($788.8) ($938.3)

($3,762.0)

Major Policy Question: K-12 Funding

• Should BSAPP cuts from Great Recession be restored?

• Gannon v. Kansas litigation • “It seems completely illogical that the State

can argue that a reduction in education funding was necessitated by the downturn in the economy and the state's diminishing resources and at the same time cut taxes further, thereby further reducing the sources of revenue on the basis of a hope that doing so will create a boost to the state's economy at some point in the future.”

- Shawnee County District Court, Case No. 10C1569 (Gannon)

November Revenue Estimates

Consensus Group on November 6 cut FY 14 forecast by $29 million and showed only 1.0 pct SGF growth in FY 15 (new round of income tax cuts phasing in).

No explosive excise tax growth showing up (at least yet).

Mississippian Lime oil play to be nowhere near as big as originally expected.

November Economic Outlook

Kansas Personal Income expected to continue to grow more slowly than US Personal Income.Kansas Gross State Product expected to continue to grow more slowly than US GDP.Kansas employment growth forecast remains very modest – only 1.4 percent for both 2013 and 2014.

April Revisions to Nov Estimates

Consensus Group on April 17 increased FY 14 forecast by $103.3 million and FY 15 by $74.3 million. But almost all of these new receipts not directly linked to tax law changes. FY 15 SGF growth now down to only 0.5 pct (new round of income tax cuts phasing in).

No explosive excise tax growth showing up (at least yet).

Key policy questions remain: Is this model sustainable? When will new revenues be arriving?

New Economic Outlook (April)

CY 2014 Gross State Product (3.9 percent) expected to continue to grow more slowly than US GDP (4.9 percent).Kansas Personal Income expected to continue to grow more slowly than US PI for both CY 2014 and 2015 (3.8% and 4.2% in Kansas vs 4.8% and 5.0% for US).Higher energy prices could hurt sales/excise growth – relative inelasticity of demand for gasoline and residential utilities (not subject to sales tax).

Latest News: April “Surprise”

• Indiv Inc Taxes collapse $90 m last 2 weeks of April• Fiscal Cliff/Capital Gains partially (but not fully?) to blame• Problem could be $300 m by end of FY 2015

• Moody’s Downgrade of Kansas debt makes national news• Missouri, other regional states react to Kansas situation

2014 Local Unit Legislation of Note

• Rewrite of “Truth in Taxation” budgeting for locals (HB 2047)• Mach & Eq classification “clarification” (HB 2643)• Ashgrove (cement, lime) clarification (HB 2643)

• Mortgage Registration Tax phase-out, repeal (HB 2643)

• ROZ program expanded from 73 to 77 counties (HB 2643)

• COTA/BOTA; P tax val changes will suppress growth (SB 231)

• Property tax delinquent interest rate reduced (SB 231)

• LAVTRF, new local taxing options not restored or enacted

Mortgage Registration Tax Debate

• Realtors, Bankers set repeal as major election-year priority• Original bill (SB 298) would have been immediate repeal• Current tax had remained largely unchanged since 1925

• House never had time to craft alternative proposal to Senate’s

• Arguments over equity issues: millionaires and Farm Credit

• Could alternatives like real estate transfer tax or exempting only mortgages otherwise eligible for Farm Credit have finessed these equity arguments?

• Per-page fee hikes as partial replacement surfaces in Senate

Mortgage Registration Tax Debate

• Certain changes were designed to prevent opposition from State Heritage Trust Fund advocates• Mortgage registration taxes recovered a lot over the prior 3 years as housing market rebounded. Using the static model of 2013 collections likely understates significantly the impact of repeal, especially in urban counties• General property taxes are the “float” for local units. Cutting other revenue sources often leads to property tax increases

• Hypothetical mill levy equivalencies available for counties

• New equity issues: fixed-income seniors and young families?