Brownback’s Unfair Class discriminatory Tax Law Shifts Tax Burden to Wage Earners
Kansas Governor Sam Brownback used an experimental and controversial tax cut legislation model drafted by the American Legislative Exchange Council (ALEC) and signed into law one of the largest income tax cuts in Kansas history during May of 2012.
The law eliminated income taxes for (non waged based) business owners believing it would create jobs and stimulate the economy. The Kansas revenue department estimated there would be about 190,000 tax exempt business income filers affected, but failed to include 53,055 business farm returns in their total estimate.
The estimate was understated by not counting the farmers and other business entities. As a result, 333,000 Kansas tax exempt business filers paid no state income tax in 2013. Dismal revenue forecasts to adequately fund existing core programs continue to alarm Kansans including some Brownback supporters in the legislature as $700 million in revenue shortfalls are predicted for the next two fiscal years.
Supporters of the Brownback’s tax bill estimated a decrease in tax revenues by about $160 million. But according to information provided in Bryan Lowry’s February 22, 2015, Kansas City Star article, the no tax for a special class of business entities, cost the state more than $206.8 million in lost tax revenues during 2013.
The legislative research staff estimated budget shortfalls will grow to $2.5 billion by July of 2018 when the bill was first passed.
Kansas Revenue secretary, Nick Jordon explained in Lowry’s article, “In tax year 2013 there were 8,666 new filers representing $464.6 million in new income, which was proof the policy was working and growing businesses.”
Jordon’s estimate was based on 2009 data assuming four years of growth in small businesses being responsible for his reported success story. But in the same article, Lowry wrote, “It is difficult to get concrete data showing the business tax exemption is responsible for job growth because the Kansas Department of Labor said it does not track the number of employees at tax-exempt businesses."
And, the revenue department said, it had limited data on the number of sole proprietorships operating in the state at the time the bill passed which was obvious when 53,055 business farm returns, and another 90,000 tax exempt business entities were not included when the revenue loss estimates were calculated before final action was taken on the bill.
Based on this information, Governor Brownback has no way of knowing how many business related new jobs are being created without reliable data available on sole proprietorships , with no program in place for the Department of Labor to track the number of employees in tax exempt business operations.
My guess is very few sole proprietors are creating new jobs with their windfall tax exempt income because there are many mom and pop sole proprietorships especially in farming where the spouse can be hired as an employee get deductible health benefits for the family, and keep the books which is good business practice, but very little opportunity if any for new job creation.
Large corporate farming S-corporations have the expense write offs before generating hefty profits, and pay no tax. In some cases sole proprietors can join a firm and offer to pay the owner of the corporation for support services including staff to escape hiring their own employees.
For example, I am a sole proprietor and pay no state income tax, but will not use my tax exempt gift from the governor to create job growth because I work in a system that will do it for me if the overall business expands through increased revenues and services with a need to hire more people.
Cutting taxes for 333,000 tax exempt business filers will not create jobs. A demand for business services and value creation resulting in increased revenues will expand growth and create jobs.
I and twenty three (23) other sole proprietors are affiliated as independent contractors working under a C-Corporation business where the owner is President and the rest of us are Associates with freedom to operate our business in coordination with overall company goals.
The owner created the C-corporation as a repository to accumulate income and record all business expenses including wages for support staff. The C-corporations were not included in Brownback’s’ tax exemption but it becomes a moot point since most C-corporations operate like a shell where retained earnings are kept at a minimal amount for taxation purposes when the business is transferred or sold, while revenues are drained down to an IRS acceptable taxable amount each year before the Corporation files a tax return.
Contrary to what you have heard, a corporation is not a person. It’s an imaginary legal shell to move income in, deduct expenses and then start the process over each fiscal year. Many business owners have moved away from the C-corporation model to become S-corporations.
As sole proprietors where I work, we assign a percentage of our earned income to the firms’ C-corporation revenue account in exchange for use of staff, computers, copy machines, office space, phones and supplies.
It’s a great arrangement because we work as a team to build the company’s business and use the economy of scale to minimize our expenses and still be profitable without all the headaches of hiring staff, and maintaining overhead that would cost way more if we operated on our own.
At the end of the year, we receive a 1099- IRS income statement minus the amount we paid to the C-corporation for overhead expenses to use company services.
We can deduct other business expenses incurred outside of the C-corporation including car expense, travel, business meals and supplies before we report our net business income on our own tax return. We pay no Kansas income tax and pocket the money without hiring any new employees.
Now multiply this arrangement not only by the number of unknown sole proprietors in Kansas, but also S-corporations, limited liability corporations, and partnerships.
As Lowry reported, the 333,000 number does not reflect the number of businesses benefiting from the tax exempt policy, but represents the number of tax exempt tax filers.
There is a huge difference comparing a tax filer with a business owner who has the authority to expand a given business.
If a large business practice has multiple business partners, whether it be law, dental, medical, engineering, farming, accounting, architecture or any other professional practice, each business partner must file an individual tax return which will be counted separately.
Governor Brownback has created a monster without a system in place to keep score to monitor his experiment. Now the wealthiest citizens in Kansas pay no tax while their wage earner employees many on limited fixed incomes take on the tax burden. This is class discrimination at the workplace and grossly unfair to many hard working Kansans.
I met recently with several clients who have followed a financial plan we developed for them twenty five years ago at age 21 or when they were first married. Now they have children ready for college with their most expensive years ahead.
As a result of doing all the right things by buying adequate life insurance, maxing out their 401-k retirement plans, buying Roth IRA’s, 529 college savings plans, and working long hours to achieve success in their business careers- making high six figure wage earner income, so their spouses could be home raising their children, they are now being treated unfairly.
My high income non- business owner clients paid state income taxes in 2013 totaling $8000 to $10,000 while I and 332,000 other Kansans paid none. My office assistant and all of our wage earners in the office paid more tax than any of the business owners in our company and that is just wrong.
I urge all Kansans who are part of this class discrimination group to contact your legislators and show some outrage because you are being treated unfairly while the rest of us who pay no tax and create no new jobs sit by and watch it happen.
Larry Weigel, 1809 Kingwood Dr. Manhattan, Ks. 66502 email@example.com