In their haste to pass the biggest tax cut in state history, Kansas policymakers and proofreaders overlooked some important details that now have accountants scratching their heads about what they should tell their business clients.
For example, the 38-page bill signed into law by Gov. Sam Brownback in May that is scheduled to become effective for 2013 tax filings refers to a couple of sections in the Kansas tax code that don’t exist.
“I understand what they were trying to accomplish,” said Jerry Capps, senior vice president of state and local tax at Allen, Gibbs and Houlik, a Wichita firm that bills itself as the largest independent accountancy in the Midwest. “It’s just that there’s some unfinished business there … that needs to be looked at, I think.”
Capps’ firm has conducted seminars on the new tax law, which among other things was expected — or at least was intended — to eliminate state income taxes for owners of as many as 191,000 of the state’s estimated 237,000 businesses and essentially leave only people who are wage earners with any state income tax liability.
He has described the law’s technical problems at those sessions. The problems also were discussed at a recent conference of Kansas accountants at the Prairie Band Casino near Mayetta. The state’s top revenue officials were on hand for that, including Revenue Secretary Nick Jordan and Budget Director Steve Anderson, who also happens to be a certified public accountant.
The glitches were cited again Tuesday at a meeting staged in Overland Park by the Brownback administration to advertise the law’s potential benefits to businesses.
“We had a hiccup in the legislation, and now we need to correct that hiccup,” said Gary Allerheiligen, former president of the Kansas Society of CPAs, a group that has recommended that the Legislature correct the errors as soon as possible when it reconvenes in January.
Meanwhile, “you kind of scratch your head,” Capps said. “What do you do? What do you advise? With that sort of dilemma for state income tax, what do you tell your clients to do?”
“The way I see it, what we passed is a work in progress,” said Sen. Les Donovan, the Wichita Republican who chairs the Senate Tax Committee and is in the running to be the next Senate president.
Capps and others have found three significant “technical” errors in the new law.
He said state revenue officials probably can fix two of them as they write rules or clarifying guidelines for the new law. Those rulings should be out next month, according to Kansas Revenue Department officials. But everyone seems to agree that one of the problems will require sending the law back to the Legislature for repairs.
One of the problems, the apparent but unintended elimination of itemized deductions, already has been addressed with a ruling from the revenue department.
A second confounds or undermines the utility of an earlier business tax break called PEAK, which allows companies that relocate or expand in Kansas to keep 95 percent of their workers’ state tax withholdings. That one is still up in the air.
The biggest technical problem deals with the determination of what accountants call “basis,” the formula by which the value of a business is determined for tax purposes. Because of that glitch, owners of companies intended to benefit from the law might not benefit at all and could find themselves deeper in the hole to state and federal tax officials should they choose to sell their enterprises.
Technical problems with major new laws due to quick or sloppy legal drafting are not unprecedented. But those problems with Senate Substitute for House Bill 2117 are considered by some to be emblematic of the torturous way the legislation was passed and the larger dilemma it is expected to produce for funding state and local government services within the next two years and beyond.
Some legislators predict the technical changes can be made without a major reopening of the tax debate that left last year’s Legislature bitterly divided, but others are not so sure. After the November elections, there will be dozens of new legislators, and the makeup and leadership of the House and Senate will be quite different. Conservative Republicans who supported the tax cuts largely prevailed in the Senate primaries, but the House remains more of an open question.
That added political uncertainty on top of the law’s technical problems has put many accountants and their business clients in wait-and-see mode.
The KHI News Service is an editorially independent initiative of the Kansas Health Institute. It is supported in part by a variety of underwriters. The News Service is committed to timely, objective and in-depth coverage of health issues and the policy-making environment. All News Service stories and photos may be republished at no cost with proper attribution, including a link back to KHI.org when a story is reposted online. An automatically updated feed of headlines and more from KHI can be included on your website using the KHI widget. More about the News Service at khi.org/newsservice or contact us at (785) 233-5443.