United States

Kansas state legislature fails to override governor's veto of tax bill

Tax reform legislation aimed to address growing revenue shortfalls

TAX ALERT  | 

On Feb. 22, 2017, the Kansas state legislature failed to override Gov. Brownback’s veto of House Bill 2178. House Bill 2178 would have enacted a number of changes to the state’s tax statutes, some of which were originally enacted in 2012, and heavily supported by the governor at that time. The Kansas House voted to override the veto, but the effort failed in the Kansas Senate where the required 27 votes fell three members short.

Background

On May 22, 2012, Kansas Gov. Brownback signed into law House Bill 2117, providing broad  changes to the state’s tax law, especially for owners of limited liability companies (LLCs), S corporations and sole proprietorships. The changes, which became effective for the 2013 tax year, included:

  • Eliminating individual income tax on non-wage income of LLCs, S corporations and sole proprietors
  • Lowering the individual income tax rate from 3.5 percent to 3 percent for income under $15,000 ($30,000 married filing jointly) – currently scheduled to be 2.7 percent for the 2017 tax year
  • Lowering the individual income tax rate from a top rate of 6.45 percent to 4.9 percent for income over $15,000 ($30,000 married filing jointly) – currently scheduled to be 4.6 percent for the 2017 tax year
  • Doubling the standard deduction from $4,500 to $9,000 for head of household filers
  • Eliminating some itemized deductions and some credits for individual income taxpayers
  • Eliminating a number of often-utilized individual income tax credits

However, in recent years, Kansas has experienced falling revenues and increasing budget deficits. State revenues have been projected to fall by over $300 million in fiscal year 2017 and upwards of $500 million in fiscal year 2018 if no additional action is taken.

House Bill 2178

House Bill 2178 was passed by the legislature on Feb. 17, 2017, and presented to the governor, who vetoed the bill on Feb. 22, 2017. The legislation would have made a number of changes, including addressing the tax reform from the 2012 legislation, as follows:

  • Restoring the individual income tax on non-wage income of pass-through entities
  • Maintaining the individual income tax rate from 2.7 percent for the 2017 tax year and thereafter for income under $15,000 ($30,000 married filing jointly) – currently scheduled to be 2.6 percent for the 2018 tax year and thereafter
  • Raising the individual income tax rate from 4.6 percent to 5.25 percent for income over $15,000, but not over $50,000 ($100,000 married filing jointly), for the 2017 tax year and thereafter
  • Creating a new individual income tax bracket for incomes over $50,000 ($100,000 married filing jointly) and taxing those incomes at 5.45 percent, for the 2017 tax year and thereafter
  • Restoring an itemized deduction for medical expenses allowed under federal law, previously repealed in 2015
  • Repealing certain subtraction modifications provisions related to net gains from certain livestock sales

According to fiscal estimates in the supplemental notes to the legislation, those changes would have increased state revenues by $590.2 million in fiscal year 2018 and over $450 million in each fiscal year between 2019 and 2022.

Takeaways

The legislature and governor have both expressed interest in addressing the state’s current and predicted revenue shortfalls. Considering how close the veto override effort was, it is likely the state legislature will build on the proposed changes of House Bill 2178 in subsequent attempts to better the state’s financial position. Kansas taxpayers should continue to watch for potentially significant reform this legislative season.

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