James Davis is currently serving as the Chamber’s Vice Chair of Government Relations. He is Vice-President Bankcard Manager with CoreFirst Bank & Trust. James has been an active Chamber member for years and served as Chairman of the Board of Directors in 2011. In his role as Vice Chair of Government Relations, James works closely with Curtis Sneden to stay abreast of developments at the Statehouse and at other levels of government as they work to advance the Chamber’s legislative priorities.
What has been going on with the legislature this year?
The story since the legislature came to town in January has been the budget. Lawmakers were told at the end of 2016 that they faced a budget shortfall of about $350 million which they would have to fill by June 30, 2017. They knew the budget for the next fiscal year beginning on July 1, 2017, would be at least $400 million short unless they made deep spending cuts, raised taxes or some combination of both. We have been watching a small handful of other pieces of legislation but all of them have basically been over-shadowed by the tax and budget debate.
Did the 2016 elections make a difference in the way the legislature is operating?
A very interesting dynamic which has been playing out this year has to do with the large number of new moderate members in the House and the Senate. Last year, there were 27 Senators who were generally considered “conservative.” Now there are 15. In the House, there were 63 conservatives and now there are 43. Those numbers are fluid because any given member could hold conservative views on one issue and more moderate views on others. Nevertheless, the move to moderation following the elections in November was clear and the effect of that has been most obvious in the House’s willingness to take up such controversial topics as Medicaid expansion and tax reform.
Setting aside the members’ political leanings, we have been very encouraged to hear that the 45 or so freshman members of the House have taken it upon themselves to meet each week for lunch. Regardless of party, all these freshmen have been deliberately working together, getting to know each other better and gathering unbiased information about the issues they face. We’ve been told by veterans of the legislature that this type of cooperation has not been seen in recent years. So it’s an encouraging new pragmatic approach.
Have they made any progress on the budget shortfall?
Yes and no. The House passed a significant tax reform package in mid-February. That bill would have kept the lowest individual income tax rate at 2.7%, instead of allowing to drop to 2.6% as it is currently scheduled to do. It would have raised the middle-income tax rate from 4.6% to 5.25% and created a new top tax rate of 5.45% for individuals earning over $100,000 per year. The bill would also have allowed people to once again deduct their medical expenses and a percentage of their charitable contributions. According to researchers, the tax bill would have raised about $590 million in Fiscal Year 2018 and about $454 million in the following year.
Possibly the most controversial feature of the bill was its repeal of the LLC exemption. Many of our small business members who have been helped by the LLC exemption do not want to see it repealed but they recognize repeal may be inevitable to a return to a balanced tax structure. Our main concern has been that the repeal takes effect retroactively on Jan. 1, 2017. We’ve made the point to our own legislators and other leaders in the House and Senate that, while the repeal seems all but inevitable, changing the tax laws in the middle of the year will be highly disruptive to small businesses. We will continue to press that point home.
So what happened?
The House passed the tax bill by a wide margin. So did the Senate, the very next day. On the following Tuesday night, Feb. 21, Governor Brownback took the stage at a statewide dinner and declared unequivocally that he would veto the bill. And he did just that the following morning. Within hours, the House had convened and voted to override the Governor’s veto. That afternoon, the Senate took up the same matter. It takes 27 Senators to override a veto; 24 voted to override. So that particular tax package died right then. Lawmakers will have to go back to the drawing board and come up with a new solution, and the clock keeps ticking to June 30.
If you listened to the speeches in the Senate, it sounded like one of the main reasons several Senators wanted this tax bill to die is the retroactivity I mentioned earlier. Now to be clear, the main concern those senators expressed over retroactivity wasn’t disruption to business. The tax bill would have raised nearly everyone’s rates retroactively. That would have meant every person earning a paycheck would have seen a greater portion of their pay withheld to make up the difference by the end of the year. The senators seemed most concerned about the impact retroactivity would have on hardworking employees. In any case, if a new bill is written which does basically the same thing but takes effect prospectively, on January 1, 2018, for example, there might well be enough senators willing to vote to override a veto if the whole thing played out that way again. This is conjecture, but that’s how it sounded.
We are urging the legislature to consider the disruptive impact retroactive repeal would have on small businesses and to pursue repeal, if at all, effective after Jan. 1, 2018. We also hope the legislature will explore other approaches to tax reform which could have the effect of restoring balance to the tax code while still supporting small business and encouraging job creation.
How does school finance play into all of this?
The Gannon case has been a little like a cloud hanging over the entire legislative session. Lawmakers have known that, even if they made painful spending cuts to get to the end of the year and cast some very tough votes to increase taxes, the state Supreme Court could rule at any time that they needed to find anywhere from $300 million to $800 million more to fund public schools. Well, the court did rule on March 2 that the current method of funding public schools in Kansas is unconstitutional and it gave the legislature until June 30 to fix the problem.
The case is complicated, but it has to do with whether the legislature has been meeting its constitutional obligation to adequately fund public schools. Two years ago, the governor and the legislature abandoned the old school funding formula and adopted a block grant system under which school districts were supposed to receive more or less the same amount they received the year before. The Gannon plaintiffs contended that sort of blunt approach wasn’t good enough and that many Kansas students were suffering because their schools simply weren’t being given enough resources by the state. That is an oversimplification but it paints the basic picture. The court already ruled last year that the block grant system was inequitable because it did not effectively treat rich and poor school districts the same way.
Now the court has lowered the other shoe and ruled the block grant system is not just unfair it is inadequate. The House has a committee which has been hard at work already trying to design a new school finance formula which is equitable and will, hopefully, be adequate. Senate President Susan Wagle recently appointed a similar committee on the Senate side.
Those are big issues. Is there anything else you’ve been watching at the Statehouse?
We are encouraged that a couple of bills the Chamber supports are moving forward. One of them addresses the problem of blighted housing by creating a process by which cities, like Topeka, could reclaim long-abandoned houses and put them into the hands of non-profits who could restore them. These are houses whose owners haven’t been seen for years, in many cases. Their run-down properties can have a ruinous effect on their neighbors. So this bill is really about giving neighborhoods in Topeka and elsewhere a chance to start rebuilding themselves.
The other bill would give cities the ability to designate certain areas within which adults could consume beer and wine as they strolled from, say, a restaurant to an art gallery down the street. It’s a complicated issue because the liquor laws have to be observed and enforced no matter what. We’re helping move legislation forward this year which accounts for those complexities and still gives cities, like Topeka, the right to decide for themselves whether to create these kinds of dynamic social environments. We think under the right circumstances an entertainment district of the sort contemplated by this bill would be a huge draw for Topekans, especially our young professionals.
We are also very pleased the House passed a bill to expand Medicaid. Over 150,000 Kansans earn too much to be eligible for Medicaid now but not enough to afford private insurance. This bill expands Medicaid to cover those individuals and simply takes advantage of the federal government’s obligation to reimburse 90% of the cost. From our point of view, especially since healthcare is such an important part of our local economy and our healthcare providers have been struggling with lower reimbursement rates, expanding Medicaid is something of a no-brainer. We hope the Senate will pass the same bill but, frankly, the governor has given no indication that he is willing to approve it. We’ll have to watch to see how this important issue plays out.