The Republican-controlled Senate voted 24-15 to pass S.B. 22 Tuesday evening. The bill would provide a 100% tax exemption for GILTI under Internal Revenue Code Section 951A
before deductions allowed under Section 250(a)(1)(B) , and offer an income tax exemption for Paycheck Protection Program loans received from the Coronavirus Aid, Relief and Economic Security Act . The legislation will next move to the state House of Representatives.Under the bill, taxpayers would also be provided a subtraction for the amount of the disallowed business interest expense deduction under Section 163(j)
. That provision, along with the GILTI exemption, would begin in tax year 2021. Additionally, the bill would allow Kansas taxpayers to itemize their state returns regardless of whether they itemize their federal returns, starting in tax year 2020, and clarify that individuals could not be taxed on unemployment compensation that was fraudulently received by someone else through identity theft.Passing the bill "is a critical first step towards finally reversing an unintended tax increase while providing Kansas families and businesses a boost to aid in our economic recovery," Senate President Ty Masterson, R-Andover, Vice President Rick Wilborn, R-McPherson, and Majority Leader Gene Suellentrop, R-Wichita, said in a joint statement Tuesday.
The bill represents the fourth consecutive year that Kansas lawmakers are attempting to decouple from certain provisions of the 2017 federal Tax Cuts and Jobs Act
, including GILTI, which Democratic Gov. Laura Kelly and other Democrats have denounced as prioritizing tax relief for large businesses over individuals. Kelly vetoed two similar conformity bills in 2019, saying the state's budget couldn't absorb the decreased tax revenue that would have resulted from them.Senators largely rejected an amendment from Democrats to gut the bill and replace it with a host of Kelly's priorities, such as requiring marketplace facilitators like Amazon to collect sales and use taxes on third-party sales and imposing a tax on digital products. But the Senate approved a portion of the amendment that would increase the state's standard deduction to $4,050 from $3,000 for single filers and from $7,500 to $10,125 for joint filers by tax year 2022.
During debate, Senate Republicans shot down the digital products tax because they said it would heighten the sales tax burden on individuals, repeating arguments they made when ignoring the proposal from Kelly last year. In voting against the marketplace tax, Sen. Caryn Tyson, R-Parker, chairwoman of the Senate Committee on Assessment and Taxation, said it would be best for her committee to instead fully vet a marketplace bill that is pending before the panel.
Other Republicans questioned whether the amendment's lack of a threshold for marketplaces would run afoul of the U.S. Supreme Court's 2018 Wayfair
ruling, which allowed states to receive sales and use taxes from businesses that aren't physically present in the state. Kansas has drawn criticism for being the only state that collects taxes from remote sellers without providing an exception for small businesses. The state currently has no tax obligation for marketplaces.In response to concerns that the Wayfair ruling mandated that states must offer a nexus threshold, such as the $100,000 in sales that most states have established, Senate Minority Leader Dinah Sykes, D-Lenexa, who offered the amendment, said the threshold was nonbinding dicta from the ruling.
In a statement after the vote, Sykes objected to the Republicans' opting to include the standard deduction increase in the bill while retaining the federal conformity provisions that her full amendment would have stricken. The full amendment was revenue-neutral, she said.
"In rejecting the provisions that would pay for this tax relief for Kansas families — and would level the playing field for Kansas businesses who are at a competitive disadvantage to global retailers — they're ensuring that the benefit to Kansans is offset by the damage created by the more than $1 billion hole this leaves in our budget," Sykes said.
An official fiscal note on the revised bill was not immediately available on Wednesday, but estimates offered on the Senate floor suggested the bill could decrease state tax revenue between $475 million to more than $600 million in fiscal year 2022.
During a Tuesday news conference unveiling the amendment, Kelly said it was unthinkable for lawmakers to push the decoupling bill while the economy is suffering amid the spread of COVID-19, the respiratory illness caused by the novel coronavirus.
Despite her sharp criticism of S.B. 22, Kelly wouldn't commit to saying she would veto it. The governor said that she will continue to press forward with her own tax priorities despite Republican supermajorities in the House and Senate.
"I'll never say die on good policy. This is good tax policy," Kelly said of the amendment. "What's being presented in Senate Bill 22 is bad tax policy."
During debate on the bill, the Senate also mostly approved an amendment from Sen. Dennis Pyle, R-Hiawatha, to provide an income tax exemption for Social Security benefits and amounts received from retirement plans. However, the chamber rejected a provision from the amendment that would have offered the GILTI subtraction for tax year 2020.
Tyson said in a statement Tuesday that the bill "provides real and immediate relief to our families and businesses who have stood strong during the past year and endured the many challenges associated with the pandemic."
Tyson and a representative of Kelly did not immediately respond to requests for comment on Wednesday.
--Editing by Vincent Sherry.
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