FAIRWAY, KS — In late 2012 and early 2013, reporters in Kansas began to take note of an oddity in the massive tax-cut plan pushed by statehouse conservatives and Gov. Sam Brownback. Profits generated by certain local companies, they found, would suddenly face no state tax liability at all, while other companies of comparable size would still have to pay state taxes. Some local attorneys would now face no state income tax, while their secretaries (much like Warren Buffett’s) would still have to pay up on April 15 as before.
These discrepancies were the result of a novel and largely unremarked part of the new legislation: Along with significant cuts to income and corporate tax rates, state taxes for so-called “pass-through” business income would now be eliminated entirely. This is the income that many companies—sole proprietorships, partnerships, limited liability corporations, and S corporations—“pass through” to their owners to be taxed as personal income rather than business income. Kansas, home to an estimated 191,000 such companies, would be the first state to do away with taxes on pass-through income.
“This is pretty unprecedented,” Matthew Gardner, executive director of the nonpartisan (but left-of-center) Institute on Taxation and Economic Policy, told me in an interview.
The Hutchinson News and the Kansas City Star put a human face on the changes in Kansas, noting confusion among local business owners and drawing comparisons between the companies that would benefit and those that would not. These stories raised important questions about the efficacy and fairness of the unprecedented, untested new measure.
But by the time these stories went to press—in August 2012 and January 2013, respectively—the debate in Topeka was effectively over. While the tax changes didn’t go into effect until New Year’s Day 2013, Brownback had already signed the tax cuts into law in May 2012, over objections that they would bust the state’s budget and lead to cuts in social services. That August, many of the moderate Republican state senators who had fought the governor over the tax cuts were ousted in primary battles, having been targeted by conservative groups funded by Wichita-based energy magnates David and Charles Koch.
This year, history is repeating itself in neighboring Missouri. In a rush to compete with Kansas, this spring both Republican-led chambers of the legislature in the Show-Me State passed similar tax-cut packages, including a 50-percent exemption for pass-through income phased in over five years. A revised plan that abandons a proposed increase in the state sales tax passed the Senate on Wednesday and the House on Thursday; it now goes to the desk of Gov. Jay Nixon, a Democrat. As in Kansas, the move is backed by conservative groups funded by deep-pocketed local financiers—in this case, largely by retired financial executive Rex Sinquefield. And, as in Kansas, statehouse reporters have been scrambling to stay ahead of the story.
“There are so many moving parts in the bill, and that’s been one of the obstacles in writing about it,” Virginia Young, statehouse reporter for the St. Louis Post-Dispatch, told me.
Young’s April 29 story, “Tax shuffle could shake up Missouri,” provides some of the most comprehensive coverage of the pending tax measures so far.