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IRS Data Refutes Tax Evasion Theories

When Kansas exempted pass-through income from state income tax beginning in 2013, the Department of Revenue estimated that 191,000 entities would take advantage of the provision, but the actual number of 330,000 claimants in the first year prompted media to declare that the exemption created a massive wave of tax evasion.  Tax return data from the Internal Revenue Service, however, shows that the original estimate was mistaken.

According to KDOR Chief Economist Michael Austin, ” In 2011, when the tax policy was estimated, KDOR referred to Federally-held IRS data. The most recent dataset available at the time was for tax year 2009 and it had three categories of returns that would be considered as tied to a personal business; “Business or Profession Net Income”, “Number of Farm Returns”, and “Partnership/S-Corp Net Income”. The sum of these three business returns resulted in an estimate of 330,000 filers that would be impacted by the tax policy.”

IRS pass through

There were 191,991 Schedule C proprietors in 2009, which is very close to the number of entities used in legislative and media discussions but including farm returns from Schedule F and other entities from Schedule E, Kansas actually had 329,511 total pass-through entities in 2009.

Tax Revenue to be $1.45 Billion above Inflation

The largest tax increase in state history just passed by the 2017 Legislature is projected to exceed long term inflation by $1.45 billion in FY 2019.  If General Fund tax revenue had been increased for inflation since FY 1995, it would be $5.06 billion by FY 2019 but instead is projected to be $6.51 billion by Kansas Legislative Research Department.

SGF tax inflation

Inflation is the Bureau of Labor Statistics’ Consumer Price Index for Midwest Urban Cities calculated on a fiscal year basis, with inflation for FY 2018 and FY 2019 assumed to be at the FY 2017 rate of 1.4 percent.

ACT Scores Decline Despite Funding Increase

Kansas students taking the ACT test in 2017 produced slightly lower scores than the previous year, and scores have remained relatively unchanged for many years.  The average score for all students was 21.7 on a scale of zero to 36; that’s down from 21.9 last year and the same as in 2005.  Average scores for the primary demographic breakouts are: White 22.6 (down from last year but higher than 22.1 in 2005), Hispanic 19.2 (same as last year and up from 19.1 in 2005) and African American 17.5 (down from 17.6 last year but up from 17.4 in 2005).

ACT 1

The education lobby attributes the 2017 score decline to a lack of funding, although historical data shows there is no correlation (let alone causation) between changes in spending and scores.

The widening achievement gap for minority students is especially apparent on ACT’s measurement of College Readiness in English, Reading, Math and Science.   The percentage of White students considered college-ready in all four subjects went from 28 percent in 2005 to 35 percent this year; Hispanic students moved from 10 percent to 14 percent and African American students at still at 6 percent as they were in 2005.

ACT 2

ACT defines college-ready as having a 50 percent likelihood of getting a ‘B’ on an entry-level course or a 75 percent likelihood of getting a ‘C’.

Kansas Ranked 6th for State School Funding

New data from the U.S. Census Bureau shows Kansas had the 6th highest share of school funding provided by state government in 2015.  State school funding comprised 66 percent of total funding in Kansas, while the national average for state school funding was 47 percent.  The national average for local taxpayer support was 45 percent but Kansas local taxpayers only provided 26 percent of funding.  The federal taxpayers’ share of funding was 8 percent in Kansas and across the nation.

No other regional state comes close to Kansas for state school funding.  The next highest share among neighboring states is Oklahoma at 49 percent, followed by Colorado (45 percent), Missouri (42 percent) and Nebraska (32.5 percent).

Kansas also made the Top Ten list for Capital Outlay spending per pupil and Bonded Indebtedness per pupil.  Kansas’ $1,939 per pupil on Capital Outlay was the 5th highest spend in the nation and almost double the national average of just $1,075 per pupil.  Kansas was #8 nationally for Bonded Indebtedness at $10,865 per pupil.  Census uses headcount enrollment rather than full time equivalent enrollment as does the Kansas Department of Education for its per-pupil calculations, so the averages are a little lower than Kansans are used to seeing.

At $12,418 per-pupil, Kansas is ranked #25 for total spending and is #32 for current spending (excluding Capital Outlay, Debt Service, Interest and other amounts designated by Census) at $10,040 per-pupil.  Kansas had the 14th highest per-pupil Cash & Securities holdings in the nation, which, as explained recently, includes a little over $1 billion in unspent bond proceeds.

Kansas also has relatively high rankings for growth rates since 2001.  Total spending per-pupil growth of 70 percent was ranked #16 and far exceeded the national average of 51.6 percent.  The growth in current spending was just below the national average (54 percent versus 56.4 percent) but Kansas could easily exceeded it if local school boards hadn’t put so much money into cash reserves.

Kansas added $781 million to its Operating and Capital reserves between 2001 and 2015; diverting just 10 percent of that increase to current spending would have increased current spending per-pupil to the national average and still left $775 million in operating reserves and $412 million in capital cash reserves.  And Kansas would still have had the 2nd highest Cash & Securities growth rate in the nation.

$3 Billion Tax Hike Over 5 Years

The Legislature’s override of the Governor’s veto will impose a $3 billion / 5-year income tax hike on Kansans.  Marginal tax rates on all individuals are increased retroactive to January 1, 2017 and then hiked again in 2018.  So not only will your employer have to withhold more from your paycheck starting July 1, you’ll either have to further increase withholding or write a check next April for the tax increase on your earnings for the first half of this year.

The rate on the first $15,000 single / $30,000 married taxable income jumps 15 percent by next year, going from 2.7 percent to 3.1 percent.  A new second bracket on the next $15,000 single / $30,000 married taxable income goes up 14 percent and there’s a 24 percent increase of every dollar of taxable income thereafter.  The rate increases for those who itemize will be partially offset by the phase in of deductions for mortgage interest and medical expenses (50 percent this year and next, 75 percent in 2019 and 100 percent in 2020.).  The child care tax credit will be brought back in 2018 at 12.5 percent of the allowable federal amount and moving to 18.75 percent in 2019 and 25 percent thereafter.

marginal rates

The marginal rates may be lower but the sales tax and cigarette tax increases instituted since then remain in place.  According to an analysis from the Kansas Department of Revenue, the net effect of all taxes changes between 2012 and 2016 was only a $393 million tax reduction for Fiscal 2018; the $591 million Kansas income tax hike just imposed for Fiscal 2018 means citizens will be $198 million worse off next year on net than in 2012.

Of the $3 billion total increase tallied by Kansas Legislative Research, the Kansas Department of Revenue says $1.2 billion is attributable to elimination of the pass-through exemption (presuming, of course, that none of those businesses pick up and leave).  The remaining $1.8 billion tax increase means the ordinary citizens are stuck with 61 percent of the total increase.

annual tax increase

The exemption on pass-through income for proprietors, partnerships, limited liability corporations (LLCs) and sub-S corporations is eliminated effective January 1, 2017.  That income passes through to the individuals owners and is therefore taxed at the above marginal rates.

The Legislature also put many of the lowest earners back on the tax rolls.  Previous law exempted the first $5,000 of taxable income for single filers and the first $12,500 for married filers; those exemptions are reduced to $2,500 and $5,000 respectively.

General Fund Spending Sets New Records

The budget and large tax increase passed by the 2017 Legislature will increase General Fund spending by nearly $500 million between FY 2016 and FY 2019, topping out at another new record of $6.613 billion.

KLRD record spend

Contrary to many claims over the last few years, General Fund spending actually increased several times since tax cuts went into effect in 2013 and assuming inflation continues at its current pace, spending will consistently be $1.3 billion higher than long term inflation (BLS Consumer Price Index for Midwest Urban Cities on a fiscal year basis).

SGF spending inflation

Population growth may account for some spending changes, particularly in demographics such as school-aged children and seniors on social services, but infrastructure and other fixed costs of government need not change proportional to population.  But even if one adjusts for inflation and full population growth, Kansas is still budgeting to spend $625 million above that adjusted level in FY 2019.  General Fund spending $2,050 per capita this year by adjusting for inflation, but Kansas plans to spend $2,263 per capita based on consistent population growth.

SGF per capita inflation 19

General Fund spending by agency is available here, going back to 2005.

School Employment Growing Faster Than Enrollment

School district full time equivalent enrollment and personnel reports show employment has been growing much faster than enrollment.  Since 1993 (the oldest data available from the Department of Education) enrollment grew 7 percent while total employment jumped 26 percent.  The last twelve years has seen enrollment increase by 4 percent with total employment up 6 percent.  Non-teacher employment grew much faster than classroom teacher employment over both periods, while Classroom Teacher employment outpaced enrollment over the long term (13 percent vs. 7 percent) and kept pace over the last twelve years.  While enrollment grew just 4 percent since 2005, schools added 10 percent more Managers and 8 percent more Other Non-Teachers.

2017 employ enroll

There were 16.4 students per classroom teacher in 1993 but only 15.5 students per classroom teacher in 2017.  Students-per-teacher is not the same as class size, but it’s noteworthy that there are reports of class sizes increasing while there are fewer students per teacher.

Special Education teachers and Reading Specialists are not considered Classroom Teachers by the Department of Education; they are included in the total employment figures but not reflected in any categories in the adjacent table.  Managers includes superintendents, assistant superintendents, principals, assistant principals, directors and curriculum specialists.  All employment decisions are made by local school districts, and there are no state or federal mandates requiring any specific employment levels or positions.

Historical information gathered from state reports can be viewed by district and county here.

Debt Sets New Record at $5.56 Billion

Kansas school debt set another record for the 2015-16 school year at $5.56 billion spread across 183 districts.  Data provided by the Kansas Department of Education shows school districts loaded up on a lot of new debt since 2005:

  • $5.2 billion in new debt was issued by 149 districts.
  • Debt Service payments totaled $4.9 billion.
  • Bonded indebtedness increased $2.4 billion or 77%.
  • Debt Service payments jumped 98%, from $286 million in 2005 to $567 million in 2016.
  • $659 million more could have been available for Instruction if debt held steady since 2005.

District listings for total and per-pupil indebtedness, new debt issued by year and total debt service payments since 2005 are available on KansasOpenGov.org.  Refinanced and re-issued debt is not counted in the debt-issued totals.

Fifteen school districts issued more than 2016 school debt$100 million in new bonded indebtedness since 2005.  USD 233 Olathe tops the list at $516.8 million, with Wichita and Blue Valley rounding out the quarter-billion-dollar club.   Much of the new debt is subsidized by citizens outside the issuing district, which has a direct impact on state aid available for educating students.  Twelve of the top 15 debt issuers are subsidized by other Kansans.  State aid for school debt ballooned from $52 million in 2005 to $163 million last year. To put that in perspective, had Bond & Interest aid remained steady over that period, $530 million more could have been available to fund Instruction.

The Division of Budget estimates that Bond & Interest aid will be $181 million in FY 2017, which means another $129 million could have been available for Instruction this had districts not taken on so much debt.

Kansas had the 10th-highest debt-per-pupil in the nation based on the most current (2014) Census data last year.

Pass-Through Entities Account for 98% of Job Gains

New Census data shows that pass-through entities (proprietorships, partnerships, LLCs and sub-S corporations) added more than 54,000 jobs between 2012 and 2015, accounting for 98 percent of all private sector gains.  Most private entity types have seen little growth since 2012 but employment at the pass-through entities shot up by 12.7 percent. Kansas is also performing much better against the national average since the exemption went into place, going from 52 percent of the national average (2.4 percent vs. 4.6 percent) prior but is since at 92 percent of the national average (12.7 percent vs. 13.9 percent).

2015 PassThrough Jobs

Kansas Department of Revenue data indicates that a small portion of the job gains at pass-through entities could be attributable to companies converting from C-corporation status to take advantage of the exemption on pass-through income, but not much.  KDOR data on C-corp conversions for 2012 through 2014 shows just a slight increase in the rate of conversion to pass-through; it was 1.3% in 2012 and the average for 2013 and 2014 was 1.7%.

Spending Per-Pupil Exceeds $13,000

Average per-pupil spending was $13,015 last year and 2016 marked the third consecutive year that Kansas set a record for per-pupil spending without counting KPERS retirement funding, at $12,458.  If not for a partial deferral of a KPERS payment last year, total funding per pupil would also have set a new record.

2016 per pupil spending

School spending continues to run well ahead of long term inflation.  Total funding is 43 percent higher than if increased for inflation of the course of the old school funding formula and non-KPERS funding is 40 percent above inflation.

per pupil graphs

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