American Oil and Gas Reporter - July 2015 - 127

ConventionSection: Kansas Independent Oil & Gas Association

Kansas' Budget Woes Force
State Sales Tax Increases
By Corinne Westeman

WICHITA, KS.-Despite pressure to
bridge a $400 million budget gap, a state
income tax exemption for small business
income reported by partnerships, limited
liability- and S-corporations came through
the Kansas Legislature's veto session unscathed.
This year's tax debate as well as the
whole legislative session will be reviewed
during the Kansas Independent Oil &
Gas Association's annual convention,
Aug. 2-4 at Wichita's Hyatt Regency
and Century II Expo Hall, confirms President Edward Cross.
Cross notes that going into the legislature's annual "veto session"-which extended into mid-June-the Consensus Revenue Estimating Group projected a roughly
$400 million shortfall for the fiscal 2016
budget. He says state revenues dropped
partially as a result of oil and gas severance
tax collections falling $25 million since
November 2014. Lawmakers expected
severance taxes to yield $42 million less
in the upcoming fiscal year, he adds.
Tax proposals were a major issue
throughout this year's legislative session,
and the debate on how to solve the budget
crisis sent the legislature into its longest
session on record, at 113 legislative days,
Cross says. He adds that when he discussed
the various proposals with the chairs of
the House and Senate Tax committees,
both indicated they wanted to have several
tax options available.
Increasing state gasoline taxes was a
leading candidate in the final days of the
veto session. However, in the end, Cross
says legislators settled on raising the state
sales taxes from 6.15 to 6.5 percent, and
increasing the tax on cigarettes by $0.50
to $1.29. In total, companion bills SB
270 and HB 2109, which Governor Sam
Brownback signed into law, are expected
to raise $384 million during fiscal year
2016, which was to begin July 1.
Cross says the companion budget and
tax bills also will:
* Reduce itemized deductions;
* Postpone prior-year cuts in income
tax rates; and

* Provide those owing back taxes a
limited window of amnesty on penalties
and interest.
KIOGA's biggest concern throughout
the tax debate was legislators' interest in
modifying the 2012 small business tax
cuts, Cross reports. "Small business income is exempt if reported by partnerships,
limited liability corporations, S-corps,
and individuals," he points out. "Only
C-corps are taxable on this income."
He says lawmakers explored several
options, including:
* Taxing small businesses at the lower
income tax rate;
* Taxing the wages of LLC owners,
and requiring small businesses to have at
least one nonfamily employee to receive
a zero income tax rate; and
* Excluding passive income and losses
as modifications to federal adjusted gross
income for Kansas income tax purposes.
Ultimately, the legislature decided to
tax guaranteed payments to owners of
pass-through businesses, which was expected to affect approximately 300,000
business owners and farmers who had

stopped paying income taxes after Brownback's 2012 tax cuts, Cross confirms.
During the extended session, he notes
that Brownback had threatened to veto
any tax plan that rolled back the business
income exemption.
Other Legislation
According to Cross, the Sierra Club
was able to get legislation introduced to
increase regulation of hydraulic fracturing
as well as place a moratorium on Class II
injection wells in Sumner and Harper
counties, and set up an earthquake risk
fund. The proposals, Cross says, "would
have had very little or no environmental
impact, but very high compliance costs."
He says he visited with legislators regarding the matter, and many committee
members agreed the proposals were not
needed and should not receive a hearing.
Also during the session, state Senator
Tom Holland, D-Baldwin City, introduced
a bill to create several new, development-related surface owner property rights,
Cross says. The measure, which received
no action, would have prohibited drilling

JULY 2015 127
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