September 4, 2006

This is an early look at come of the key issues small business will likely face during the 2007 Kansas legislative session.

FRANCHISE TAX PHASE-OUT

In 2006, this was the second highest tax priority for small businesses after the Business Machinery and Equipment property tax phase-out. The third priority was the Kansas Estate Tax phase-out.

In the end, small business won on priority one and priority three, but had to give up on the Franchise Tax for the time being. It will be a top priority for both small business and big business in 2007.

The franchise tax is basically a penalty for having a well-financed business in Kansas. It is a tax charged on the Kansas net worth of all limited-liability businesses in Kansas, including all corporations, limited liability partnerships, and some trusts. Fewer than twenty states have net worth taxes, and some are phasing them out.

The Kansas tax is also highly regressive. Virtually every small limited-liability business with more than $100,000 in net worth pays on the entire net worth of the business, while large businesses pay only on their first $16 million in Kansas net worth, even if that net worth is $1 billion or more.

LOCAL EXCISE TAXES

Because the legislature had fouled up and allowed local sales taxes to become non-uniform according to the Kansas constitution, a handful of cities "chartered out" of the state sales tax law, meaning they were no longer covered by the law.

A part of the state sales tax law strongly prohibits local excise taxes of any type. A handful of cities, virtually all in Johnson County, also passed local excise taxes by "chartering out" of state law.

As dangerous as unrestricted new sales taxes were to local citizens, it was the local excise taxes that presented the greater danger. The lack of uniformity effectively opened a Pandora's Box of potential new excise taxes that cities could enact without a vote of the citizens and without permission of the legislature. Sales taxes, based on sales price, are merely a special type of excise tax. There are an unlimited number of possible excise taxes that aren't based on sales price. Kansas gasoline taxes, for instance, are excise taxes based on the number of gallons purchased.

The 2006 Legislature re-established constitutional uniformity by enacting a huge increase in local sales tax authority and allowing the cities in Johnson County that already have excise taxes to keep them, but prohibiting any new ones. The total increase in sales tax authority was about $850 million statewide. However, it is unlikely that more than $200 million in new local sales taxes will be enacted very quickly. Even at $200 million, it is a huge cost to taxpayers to get the "non-uniformity" genie back into the bottle.

The Kansas Chamber and local chambers refused to help the small business lobbyists last year in efforts to get uniformity re-established and excise taxes curtailed, so a coalition of small business groups got it done completely on their own.

This year other cities, especially Lawrence, Newton, and a number of Sedgwick County cities, will make a major push to "get equal treatment" with the Johnson County cities. In other words, they want the right to levy excise taxes.

Small business interests should pursue two avenues to prevent this. First, they should file a lawsuit to stop the "grandfathered" excise taxes in Johnson County, which are clearly unconstitutional. Second, they must be extremely active in opposing any efforts in the 2007 legislature to expand excise tax authority, and should work hard to get the legislature to kill the existing ones in Johnson County.

INDEMNITY AND ADDITIONAL INSURED CLAUSES IN CONTRACTS

This has been a big, unresolved issue in construction contracts, but is quickly finding its way into business contracts of all types.

Through contract clauses, the biggest of businesses, to avoid liability for their own bad acts, have been pushing their liability onto smaller suppliers, who in turn have been pushing the liability down to even smaller businesses. The ones hurt most are those "at the bottom of the food chain", the smallest and weakest of businesses, who are forced to accept this abuse in order to survive. The practice puts them at risk of being unable to grow due to insurance shortfalls, being unable to get insurance at all, or even being forced out of business.

Nationwide, states have outlawed these practices as bad public policy. Last year, the Kansas Senate passed, by a 40-0 vote, a bill prohibiting such practices in Kansas. When the bill reached the House, the leadership, at the request of Koch Industries, Boeing, and Spirit Aerosystems, instructed the committee chairman and vice-chairman to keep it bottled up in committee, which killed it.

EMINENT DOMAIN

The issue is using eminent domain to take private property from one private owner for the benefit of another private owner. Local government officials and chambers of commerce are strongly in favor, but 88% of Kansas citizens and 92% of Kansas small business owners are opposed.

In 2006, local governments and chambers lobbied heavily to continue to have unfettered use of eminent domain for private development. The Kansas Chamber secretly put together a "coalition" of local chambers and paid $30,000 to hire Ron Gaches, a contract lobbyist, to work the issue. In public, the Kansas Chamber represented that they weren't involved.

NFIB and WIBA sought an outright prohibition. Ken Daniel of KsSmallBiz.com took the position that we need severe restrictions but not an outright prohibition. He was pilloried for that by most small business owners.

In the end severe restrictions were enacted into law, but they don't take effect until July 2007. In the meantime, local governments are still able to use eminent domain for takings for private use, and are.

The local governments and chambers are expected to be back in force in 2007, trying to gut the restrictions that were passed in 2006, and failing that, to seek further delays or exemptions on a project-by-project basis.

SUPER-MAJORITY FOR TAX INCREASES

In Kansas, unlike the majority of states, the citizens are not allowed to decide much of anything, especially in respect to taxes.

Measures that would require a vote of citizens or a super-majority of legislators to enact tax increases will be back in 2007. One of these is the Taxpayer Bill of Rights (TABOR), but there are others. To have teeth, a constitutional amendment is required.

Small business owners, in polls, are 80% to 90% in favor of requiring extraordinary measures for tax increases, partly because they are very often the prime targets of such increases.

Government officials at all levels are vehemently opposed, as are large chambers of commerce, who are ignoring the wishes of a huge majority of their members by opposing restrictions on tax increases.

BUSINESS MACHINERY & EQUIPMENT PROPERTY TAX PHASE-OUT

Rumors are rampant that local governments and schools will make a major push in the 2007 session to gut the BM&E property tax phase-out enacted in 2006.

The new law is one of the most positive steps taken in recent years to bolster investment by key Kansas businesses and by the smallest ones, too. Kansas has one of the very highest BM&E tax burdens in the nation, preventing investment by existing Kansas businesses and serving as a barrier to recruiting new capital-intensive businesses.

The new law exempts any item with a value of $1500 new from property taxes, providing a major boost to the smallest of businesses and especially to start-up businesses. While the dollars of taxes in this category is relatively small, the impact on the smallest of businesses both in tax reductions and red tape costs will be significant.

CITY-COUNTY CONSOLIDATION

In 2006, legislation was enacted allowing cities to merge with cities and counties to merge with counties, both requiring separate votes of each entity.

The same legislation attempted to allow cities to merge with counties with a "unitary" vote, which would allow some Kansas cities to overwhelm county citizens and force them to merge with the cities against their will. This portion of the legislation failed thanks to fierce opposition in the House.

The lobbyists will be back in 2007, attempting to pass the "unitary" vote again. The Topeka Chamber and a number of other large chambers supported this legislation. The Wichita Independent Business Association opposed it. NFIB and other small business associations did not weigh in on the issue in 2006.

OTHER POSSIBLE ISSUES:

Structure of various Kansas business tax incentives: At present virtually none of these go to small businesses. Smalls aren't even allowed to apply for most of them. For the ones they can, state bureaucrats reject almost all applications from small businesses, usually on technicalities in the extremely complicated application processes. One of the most expensive of these incentives is only enjoyed by thirty or so of the largest businesses.

Small business certifications: Kansas defines a small business as smaller than many other states. In bidding for government business that has been set aside for small businesses, Kansas businesses are often ineligible while larger businesses from other states are, simply because we don't certify ours as small businesses and the other states do. This may require only administrative action and not legislation.

Regulatory Fairness Act: The U.S. Small Business Association is working nationwide to get states to adopt its model for regulatory fairness to dovetail with federal law. This has been introduced in Kansas but no vote has been allowed in any legislative committee thus far.

Kenneth Daniel (kdaniel@kssmallbiz.com) is a Topeka small business owner and free-lance writer. He is publisher of www.kssmallbiz.com, a website dedicated to Kansas small business.