Kansas Statehouse looking south at sunset. (January 22, 2014) Bo Rader File photo
Kansas Statehouse looking south at sunset. (January 22, 2014) Bo Rader File photo

Politics & Government

Do Kansas lawmakers personally benefit from business-tax cuts?

October 07, 2016 04:32 PM

UPDATED October 10, 2016 02:59 PM

Nearly 70 percent of Kansas lawmakers – or their spouses – own a business or property that allows them to benefit from a controversial tax exemption enabling business owners to pay no state tax on business income.

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Gov. Sam Brownback and his wife, Mary, also stand to benefit from the law, which was passed in 2012 at the governor’s urging. The law exempts the owners of limited liability companies, S-corporations, limited partnerships, family farms and sole proprietorships from paying state income tax on their non-wage business income. The law also extends to other sources of pass-through income, such as rents, royalties and trusts.

More than 330,000 people took advantage of the law in tax year 2014, the most recent year for which there is data, according to the Kansas Department of Revenue.

Two of them were likely the governor and his wife.

First lady Mary Brownback owns 23.88 percent of SFI LLC, according to the governor’s statement of substantial interests, a form elected officials must file with the state each year to disclose their business interests. The company manages the investment portfolio for the Stauffer family, one of the wealthiest families in Topeka, of which the first lady is part.

The governor also owns 162 acres of farmland. The Brownbacks have had these holdings at least as far back as 2011, according to the governor’s forms.

Brownback would not discuss his family’s taxes when asked at the Capitol last month. His spokeswoman Eileen Hawley provided a response by e-mail, which did not address the question, and instead touted reductions to individual tax rates that were also part of the 2012 tax change.

“Every Kansan who pays income taxes has benefited from the Governor’s tax policy,” she said.

Brownback said in 2012 that the policy would act as a “shot of adrenaline” for Kansas economy, spurring job growth because business owners would reinvest their savings into their companies.

Kansas has gained about 29,000 total nonfarm jobs since the policy went into effect in 2013. That coincided with job gains nationwide.

However, the state has actually lost jobs in the past year. Kansas lost 8,300 total nonfarm jobs between August 2015 and August 2016, according to the U.S. Bureau of Labor Statistics. And the state ranks 46th among all states in private sector job growth, according to an analysis by Arizona State University.

The tax exemption has come under increasing scrutiny as the state has struggled with budget shortfalls in recent years, including the $60 million budget gap it faces for the current fiscal year, which ends June 30. Since the tax cuts went into effect, the state has cut its budget multiple times and increased the sales tax in 2015.

Attempts in the Legislature to roll back the exemption fell short of passage the past two years after the governor promised to veto the bills.

Some lawmakers are questioning whether the tax break could lead to job creation. Based on lawmakers’ comments, another attempt to roll back the exemption appears likely in the coming session, which begins in January.

Democrat, Republican lawmakers stand to benefit

Several readers submitted questions to Curious Wichita, asking The Eagle how many lawmakers have businesses that would benefit from the exemption. The questions were submitted after the Legislature decided not to repeal the exemption earlier this year.

To answer the question, The Eagle reviewed the statements of substantial interest for all 165 lawmakers, another 50 legislative candidates and all six state executive officers. The Eagle also checked the Secretary of State’s business database and conducted numerous interviews with lawmakers to determine how businesses were organized and whether they qualified for the exemption. The actual tax returns are not public.

Five of the 40 members of the Kansas Senate had no ownership interest in an LLC or other business entity that might benefit from the tax law, according to an Eagle analysis of substantial interest forms. The other 35 members – or their spouses – owned at least one business or property covered by the 2012 law change.

In the House, 79 of the 125 current state representatives have holdings that would potentially benefit from the law.

Both Democratic and Republican lawmakers stand to benefit, and their holdings range from law practices and consulting firms to western stores and guided pheasant hunts.

House Speaker Ray Merrick, R-Stilwell, initially denied that his management company was covered by the law when greeted at the Capitol last month.

“I’ve paid more taxes since that thing’s gone into effect than I ever paid…because I’m not the right kind of company I guess,” Merrick said.

However, his chief of staff, Christie Krieghauser, later confirmed in a text message that Merrick’s company, MJM Management, is an S-corporation, which is covered by the tax change.

The speaker’s initial response was likely colored by the fact that the law change eliminated the ability for business owners to deduct business losses. If business owners aren’t required to pay tax on the income, they can’t deduct the losses, a change that costs some business owners more money than the exemption saves.

Merrick said he saw no problem with the fact that many lawmakers owned businesses covered by the tax change.

“One of the complaints that I hear all the time is (about) all the professional politicians,” he said. “Thank God, there’s business people in the Legislature. I don’t see anything wrong with that.”

Krieghauser added in an e-mail that lawmakers “give up huge portions of their earning potential to serve each year in Topeka. It’s only fair to mention that the guys are sacrificing to serve and not getting rich off the system.” She said that lawmakers are impacted by a tax change, such as the recent sales tax increase, just like other residents.

Hawley said it is a benefit for the state to have business owners involved in decisions about tax policy as members of the Legislature.

Just as educators influence education policy and medical professionals influence medical policy, business owners should be engaged in tax policy.

Eileen Hawley, governor’s spokeswoman

“They understand the real implications of tax policy for their fellow citizens and we welcome their expertise as business people and policy makers,” she said. “Just as educators influence education policy and medical professionals influence medical policy, business owners should be engaged in tax policy.”

Perceptions

The readers who submitted questions to The Eagle about the lawmakers’ business holdings, however, said it presents a troubling conflict of interest that the majority of lawmakers stand to potentially benefit from the law.

“It certainly raises questions about whose interests they’re representing: their own personal interests or the public,” said Steve Kimball, a 72-year-old retired teacher from Belle Plaine. “That raises an eyebrow.”

Linda Murphy, a 69-year-old Wichita retiree who also asked about the tax policy, said that her income taxes have increased since 2012 because the state reduced and eliminated deductions.

“I’ve never known a governor or a Legislature who have set out on purpose to ruin my state before this one,” she added.

Steve Stotts, director of taxation at the Kansas Department of Revenue, said it’s a common misconception that beneficiaries of the pass-through exemption pay no income tax at all. He said that people using the exemption still have to pay income tax on capital gains and in many cases on a salary, depending on how their business is structured.

He said the 330,000 tax filers, who saved more than $200 million from the exemption, still paid about $800 million in state income taxes in 2014 on the rest of their income.

Rep. Marvin Kleeb, R-Overland Park, the House Tax chairman, said he thinks lawmakers’ votes were based more on ideology than personal self interest. Kleeb owns several LLCs and S-corporations, but this past year voted in favor of a bill to roll back the exemption.

Critics also benefit

Some of the policy’s biggest critics are also its beneficiaries.

Rep. Mark Hutton, R-Wichita, whose business holdings include a construction company, real estate holdings and a range of other ventures, led unsuccessful efforts to roll back the policy in 2015 and 2016. Hutton, who is retiring from the Legislature, said that his business experience has informed his opposition.

Free cash does not equal employment. The only time I hire people is if I’ve got something for them to do and every businessman would tell you that.

Rep. Mark Hutton, R-Wichita

“Free cash does not equal employment,” Hutton said. “The only time I hire people is if I’ve got something for them to do and every businessman would tell you that.… Demand for a service is what drives employment.” 

Rep. Tom Sawyer, D-Wichita, the ranking Democrat on the House Tax committee, who owns an internet sales business covered by the exemption, said that data shows that “very few businesses would get enough of a tax break to even hire somebody.” He called the notion that the tax break would create jobs “a ridiculous premise.”

An analysis of Department of Revenue data showed last year that more than half of the business owners using the exemption made less than $25,000 and only saved an average of $158 as a result of the tax break.

However, the less than 1 percent of business owners making more than $500,000 accounted for 40 percent of exemption’s total cost with an average tax savings of about $38,000.

Sen. Les Donovan, R-Wichita, the Senate Tax chairman, who owns an automobile dealership in Wichita, said he’s created jobs with the money he’s saved from the tax exemption, which he estimates was more than $100,000 over three years.

Since the exemption went into effect, Donovan has installed a carwash machine at the dealership, had his front lot resurfaced and remodeled his body shop. “Built bathrooms that are good for human usage – not just body shop men,” Donovan joked.

The cost of all these upgrades is more than triple the money Donovan has saved from the exemption, but he still credits the tax savings as the cause for the improvements.

“I call it the trigger that finally got me to take the steps and do this…and in the process we have created a whole lot of jobs,” Donovan said, referring to the workers who did the construction work.

Despite his support for the overall policy, Donovan crafted a bill that would’ve required business owners to pay taxes on earnings above their first $100,000. Donovan said that he never introduced the bill because Brownback told him in a private meeting that he opposed it. Donovan said he didn’t want to waste the Legislature’s time.

Sen. Ty Masterson, R-Andover, the Senate budget chairman and one of the staunchest defenders of the tax cuts, said in an e-mail that the tax savings enabled his development company, Springboard LLC, “to purchase goods and services from other businesses that contributed to the local economy.”

Balancing factors

In addition to lawmakers, the lieutenant governor, attorney general, secretary of state and insurance commissioner all have an ownership in a business entity covered by the law.

Secretary of State Kris Kobach’s private law firm is an LLC, as is his wife’s photography business, Kobagraphy, which specializes in providing Republican candidates with campaign photos.

Kobach staunchly supports the policy as a way to grow jobs, but said that the impact to his family’s businesses has been minimal and that neither is set up to expand.

“In our case, the company wasn’t going to grow anyway because, you know, I’m not going to expand my law firm to start hiring a bunch of other attorneys,” Kobach said. “Some businesses are designed to stay small.”

Revenue Secretary Nick Jordan said that any time he travels the state he hears from small-business owners who say the exemption enabled them to buy equipment or hire an employee. “I just don’t walk away from any meeting without that happening, so I am convinced it has benefited small business,” Jordan said.

The state does not track what business owners do with their tax savings, so there’s no way to know if beneficiaries hired new employees or pocketed the savings.

However, the data is limited. The Department of Revenue does not track what business owners do with their tax savings, so there’s no way to know if beneficiaries hired new employees or pocketed the savings.

Lawmakers have grown increasingly skeptical of the policy’s economic benefits and some say the tax changes have actually hurt their businesses.

Rep. Adam Lusker, D-Frontenac, a contractor with an LLC, said that cuts to state spending, which he blames on the tax policy, have hurt his business.

“We build a lot of public work and that public work has slowed down considerably because the state doesn’t have the ability to churn money like it once did…It’s hurting our business and I’m not alone. That’s statewide,” Lusker said. “Not only contractors, but that hurts the gas stations, the local hardware stores and everybody who trades down the line.”

Sen. Rob Olson, R-Olathe, who owns two LLCs, said that the inability to deduct business losses and an increased sales tax have hurt his businesses and discouraged investment statewide. He said he expects the Legislature to evaluate the policy again next session.

“Someone that’s in business, normally what happens is they buy equipment, they buy more assets and now they’re actually paying more taxes,” Olson said. “…People are not investing and they’re not buying new equipment. They’re paying the minimal (income) tax, but they’re not doing as much investing.”

Olson added that in the long-term “you’re probably not going to see as many jobs because of that.”

VIDEO: Brownback discusses Kansas economy

Gov. Sam Brownback discusses the state of the Wichita aviation industry and argues his tax plan is spurring small business growth. (Bryan Lowry/The Wichita Eagle)

blowry@wichitaeagle.com

Contributing: Kelsey Ryan of the Eagle

Bryan Lowry: 785-296-3006, @BryanLowry3

What do you want Bryan Lowry to find out about state government – its budget, its programs or politicians. Submit your questions at kansas.com/curious.

Title

Name

Do they they potentially benefit from the exemption?

Substantial interests reported to the state

Governor

Sam Brownback

Yes

SFI LLC (wife), 162 Acres farmland, TM Holdings Inc (wife), Samuel D Brownback Trust, Mary S Brownback Trust

Lt. Governor

Jeff Colyer

Yes

Plastic Surgical Arts PA, Virtus Consultants LLC, Jeffrey and Ruth Colyer Revocable Trusts

Attorney General

Derek Schmidt

Yes

240 acres in Labette County, three rental properties in Independence, one rental property in Lawrence, TanDoor Holdings LLC

Secretary of State

Kris Kobach

Yes

Kris and Heather Kobach Farm, Kobach Law LLC, Kobagraphy (sole proprietorship), Minuteman Defense LLC

State Treasurer

Ron Estes

No

Various savings plans

Insurance Commissioner

Ken Selzer

Yes

Farm and livestock, Kansas For Selzer LLC

Data: State of Kansas

What lawmakers, candidates and state officials say about the business tax exemption:

▪ Rep. Marvin Kleeb, R-Overland Park, House Tax chairman: “Do companies make an investment decision based on their state income tax? Maybe. Maybe not.”

▪ Rep. Dan Hawkins, R-Wichita, incumbent in 100th House District: “I’m pretty darn bullish on this. I think this may be the year (we repeal it) ... There’s a reckoning coming.”

▪ Tim Hodge, Democratic candidate in 72nd House District: “I want to get rid of that badly. It’s not fair. You don’t raise sales tax to pay for business people’s income tax exemptions. That’s just not the right way to do things.”

▪ Rep. Marc Rhoades, R-Newton, incumbent in 72nd House District: “Individuals—not government—are in the best position to decide if their earnings should be saved, spent or given directly to the cause of their choice. Sending money to Topeka is not charitable

▪ Former Rep. Brenda Landwehr, Republican candidate in 105th House District: “We have actually been able to hire (because of the exemption). We took an employee that was originally getting some welfare benefits and got them off of the welfare system.”

▪ Senate Minority Leader Anthony Hensley, D-Topeka: “It’s inherently unfair ... And I think that is probably as important to vast majority of Kansans as anything else: Why am I paying taxes and they’re not?”