May 3rd, 2015 - In This Issue:
Quick Facts

Kansas Economic Forecast

for 2015

  • GDP to 2.5% in 2015, up from 1.5% in 2014
  • Hiring, up 1.9% from 1.5%.
  • Strong dollar negatively affecting exports of small planes and parts


Unemployment Rate Decreasing in the Region *

  • JoCo               3.3%
  • KCMO             5.0%
  • Kansas            4.0%
  • U.S.                 5.4%


Johnson County Residents Employed (Historical High) *

  • 2014    303,000
  • 2015    308,000


Consumer Confidence Improves in JoCo *

  • February 14    80.4%
  • February 15    96.2%


Retail Sales Exceed $1 billion monthly in JoCo *

  • 11th consecutive month exceeding $1 billion


* Source: CERI



The Legislature has entered the last leg of the 2015 legislative Session. This three (3) week period is known at Veto Session. Veto Session is traditionally used to address bills approved or vetoed by the Governor. It is also a wrap up session where we square away any remaining issues and last minute items that need to get completed before the session ends on May 16th. 


The Governor Vetoed Senate Bill 117, known as the Uber bill. Uber is a new generation business model providing transportation services to clients using personal automobiles.  Companies providing this are known as a Transportation Network Company (TNC). An issue that needs to be sorted out is we need to insure there are no gaps in insurance coverage when the TNC driver turns the application on to accept online requests for rides.  

During this Veto session, our focus will remain on the finalization of the two-year budget and modifying the tax policy. The tax policy will be amended for the third time in the last 5 years. We have to adjust the tax dials to stabilize the budget, provide adequate funding for essential government services, and maintain a low income tax environment for businesses and employees.


Winding down the legislative session is tedious and frustrating. A lot of hurry up and wait exercises. I hope we can govern and get our work done as close to May 16th as possible. 

10-Months into the Fiscal Year

The month of April tax receipts came within $4 million of estimates for the month which was satisfactory. However, for the ten month period ending April 30th, tax collections remain down $77 million or 1.7% from the prior year period.


The biggest outliers remain in personal income tax and severance tax collections.  Personal income tax collections are down $81 million or 4.3% compared to same period last year.   Severance taxes are down sharply as a direct result of lower oil prices worldwide.


The Department of Revenue reported a high volume of paper returns this year. As a result, some April returns were not processed by the close of business on April 30 and will spill over to the May totals. We expect this to be reflected in the May report.  We have a lot of ground to make up. Tax receipts are projected to increase by 2% over 2014 levels. As noted previously tax collections are down 1.7% as of the end of April.  This creates a mathematical Delta of 3.7%.

Spending Trends

Tax and Budget will be a hand in glove fit this cycle. We have had over $600 million in revenue shortfalls over the last 12 months.  This is mostly the result of projection misses and what I refer to as the pass through income tax loop hole. This has caused the budget to become unstable and needs to be fully addressed this session.

The table below shows spending trends from 2011-2017. With the recent cuts made and annual efforts to control spending the Kansas all funds budget has only grown 1.2% annually. Of course there is always more efficiency to be found in government and some may be brought forward during veto session.


An interesting trend was found when compiling this table.  Medicaid is a joint program funded between the federal government and state government to provide health care to children and very poor adults. The ratio of the match is traditionally thought to be 60/40. That is to say, 60% federal funds and 40% state funds. The match is known as the Federal Medical Assistance Percentage or simply "FMAP". Since 2011 the FMAP has slowly changed in the Feds favor. It is now approximately 56/44. This has resulted in the Federal Government paying $30 million less annually for Medicaid in 2017 than it did in 2011. On the flip side the state is paying $120 million more annually for Medicaid in 2017 than it did in 2011. All from the FMAP change. Then you add the normal medical cost growth on. 


KPERs, the state pension plan, also reported sharp increase in spending. This was by design as the plan had been financially neglected for 40 years and needed to be placed on a path to financial stability.

I think we will see several proposals to adjust the dials on tax policy.  Proposed tax modifications brought forward could include exemption repeals, consumption tax ideas,  passive income modifications, property tax modifications, and pass through income tax modifications.  I personally don't look for any change to the low income tax rates Kansas now has in place.   The change I'm most interested in is the pass through income.  I think a loop hole exists allowing  pass through entities to pass 100% of income, including owners salaries, tax free.  That is to say, avoid all Kansas income taxes, even on owner's salaries.   In my mind the legislative intent was to tax owner's salaries at the same low rate as W-2 type employees and allow the non-wage income or working capital to pass through tax free.  Pass through entities can be; Sole Proprietorships, LLC, Sub-S, Operating Partnerships, etc.


Here is a simple example of the loop hole.


I think we need to modify the small business pass through policy back to legislative intent. Closing the loop hole would result in $140 million annually to fill the budget hole. This is more of a fairness correction than anything.


Closing of the pass through income loophole, is not a tax increase. It is, rather a correction, to reflect legislative intent - in essence, the elimination of a drafting error. The Legislature did not intend to totally eliminate the state income tax on LLCs, S Corps, and sole proprietorship. Instead, the legislative intent was to lower the tax rate on these entities to provide additional working capital to grow their businesses and hire employees.

We were able to sunset the unfundable school finance formula and replace it with a block grant.  Appreciate all the advice and counsel Superintendent Hinson of Shawnee Mission School District and Superintendent Trigg of Blue Valley School District provided through the process as well as several school district CFO's. We will be working on a new formula next year and Superintentents Hinson and Trigg deserve a seat at the table.

Here is how the block grant breaks down for schools in my district.

The school districts will have stable and consistent funding while a new formula is developed.


Marearl's health is improving. She has had a tough year. Her doctors have finally put the fire out on her lung infection. She is home and getting stronger every day. As I write this she is out working in her garden. Thank you to everyone for including her in your prayers and prayer lists. She is looking forward to coming to the Capitol later this year.


Capitol Office
300 S. W. 10th Street, Room 541-E
Topeka, KS 66612

Overland Park
8416 W. 115th Street
Overland Park, KS 66210

Paid for by Jim Denning for Kansas Senate - Kathy Vance, Treasurer