Kansas Gov. Sam Brownback’s prized income tax exemption for businesses is gone.
Over the governor’s veto, in June lawmakers raised income tax rates and repealed the exemption that had benefited roughly 330,000 business owners, including about 53,000 farmers.
Farmers and other small business owners who’ve had a tax break for the past four years will now have to pay taxes on their non-wage income, including profits from farming.
In his veto message, Brownback predicted the reversal of his signature tax cuts would “substantially damage job creation and leave our citizens poorer in the future.” And yet there hasn’t been much of an outcry from Kansas farmers about the end of the income tax exemption.
If there were, Rich Felts would know about it. Felts, who farms 3,000 acres between Independence and Coffeyville in southeast Kansas, is president of the Kansas Farm Bureau.
“I didn’t hear many of my friends, Farm Bureau-wise or personal-wise, that said, ‘Hey, you know, we’ve got to do everything (we can) to hang onto this,’” Felts says.
Why not? Felts says the money from the tax exemption — championed as an effort to spur Kansas small businesses to grow and hire more workers — wasn’t enough to make a huge difference to most farming operations.
It was nice to have “a few extra dollars,” Felt says, but it wasn’t nearly enough to hire another farmhand or buy a new tractor.
“Maybe in large industry there was enough dollars that it made a significant difference, but most people, I think, it was just absorbed into the operation,” he says.
The Kansas Farm Bureau didn’t take a formal position on the tax exemption – either when it was passed in 2012, or this year when it was repealed.
What farmers were really afraid of was a property tax hike.
They knew lawmakers, who this year had been facing a projected two-year budget hole approaching a billion dollars, were looking for more revenue to buoy the state budget — and if it didn’t come from income taxes, it could have been property taxes.
In recent years, lawmakers have threatened to increase the rate at which farmland is assessed as a way to raise more revenue for education and balance the state budget.
Rural banker Kyle Campbell, of Abilene, says a property tax hike would have been much worse for farmers than the repeal of the income tax exemption.
“The biggest component of what most of our farmers own is real estate, and then you’re going to put a tax on that,” Campbell says. “It would have been very detrimental to them.”
Rep. Steven Johnson, an Assaria Republican, was among the legislators who voted for the tax increase when they successfully overrode Brownback’s veto. Johnson is also chairman of the House Taxation Committee — and a farmer on 1,100 acres near Salina.
Johnson says the income tax increase that lawmakers approved will generate $1.2 billion over the next two years. To bring in that kind of revenue from property taxes instead would have required a levy increase of 18 mills, he estimates. That would be on top of the 20 mill levy the state already requires to fund public schools. For Johnson’s farmland, that would mean about another $2,200 in additional property taxes each year.
“That is meaningfully more than income tax that I would pay annually,” he says.
But Johnson says that isn’t the main reason farmers like him would rather deal with higher income taxes than property taxes. It’s because they don’t pay income taxes when they don’t make any money.
In the notoriously volatile farming business, property tax is due in good years and bad.
“The concern with the property tax is it becomes a hurdle every year,” Johnson says. “It’s another set of hundreds of dollars that I must clear to be profitable versus the income tax, which will hit me in the years when I actually have positive income.”
And while farmers now have to pay income tax in those profitable years, another provision of the new Kansas tax law softens the blow to some degree. Farmers can once again claim deductions for things like health insurance and retirement savings. They can also carry losses forward now when they have a bad year.
Bryan Thompson is a reporter for the Kansas News Service, a collaboration of KCUR, Kansas Public Radio and KMUW covering health, education and politics. Follow him on Twitter @KSNewsBryan.
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