Brief

S.B. 500, the Kansas Tax Reduction and Reform Act of 1998, would enact a number of inheritance, property, sales, income, severance, premium, and privilege tax cuts.

Inheritance Tax Repealed

The Kansas Inheritance Tax Act would be repealed and replaced with the Kansas Estate Tax Act, effective for the estates of all decedents dying after June 30, 1998. The "pick up" estate tax would be an amount equal to the maximum credit allowed by Section 2011 of the Internal Revenue Code against the tax that otherwise would be imposed on the transfer of the taxable estate of the decedent, multiplied by a fraction, the numerator of which is the Kansas gross estate value and the denominator of which is the total gross estate value.

Under such a pick-up estate tax which would piggyback on the federal estate tax, estates with a value of $625,000 during the second half of 1998 would incur no liability (with this amount increasing to $1 million in 2006 pursuant to the 1997 federal law change). An additional provision enacted in 1997 allows family-owned farms and businesses an exclusion of $1.3 million (an additional $675,000 in 1998, for example) if the farm or business is at least 50 percent of the estate and the heirs materially participate in the business for at least ten years after the decedent's death.

Under current law, Kansas computes both the pick-up tax and the inheritance tax and levies whichever liability is greater. The inheritance tax totally exempts surviving spouses, gives Class A distributees (generally lineal ascendants and descendants) a $30,000 exemption, and gives Class B distributees (brothers and sisters) a $5,000 exemption.

Singles' Income Tax Cuts

Individual income tax reductions enacted in 1997 for single filers would be accelerated such that the fully phased-in rates currently scheduled to apply in tax year 2000 would be applicable in tax year 1998. The effect of this acceleration would be tax cuts in both tax years 1998 and 1999 relative to current law.

Personal Exemption Increases

The individual income tax personal exemptions would be increased from $2,000 to $2,350 beginning in tax year 1998 and (pursuant to a House Committee amendment) would be indexed prospectively beginning in tax year 1999. The current $2,000 level is tied to what the federal personal exemption amount was in the late 1980s. Pursuant to indexation, the current federal personal exemption amount for tax year 1998 will be $2,700.

Tax Credits for Machinery and Equipment Property Taxes Paid

New Section 20 would provide, beginning in tax year 1998, refundable income, premium, and privilege tax credits equivalent to 15 percent of timely property taxes paid on commercial and industrial machinery and equipment (including such property owned by not-for-profit entities) and machinery and equipment assessed under the mineral leasehold interest subclass. The Senate Committee amendment to this section would clarify that the credit would be applicable to taxpayers filing under subchapter S status, partnerships, and limited liability companies. The Senate Committee of the Whole amendment clarifies that the credit would be applicable beginning with property tax year 1998 liability.

School Finance Property Tax Provisions

The bill would reduce the mandatory school district general fund property tax levy for the 1998-99 school year from 27 to 23 mills. The $20,000 exemption from the levy for residential property also would be made permanent.

Property Tax Exemption for Oil Leases

The property tax exemption in K.S.A. 79-201t for oil leases (other than royalty interests) would be expanded such that wells with a completion depth of less than 2,000 feet and an average daily production of three barrels or less would be exempt (up from two barrels per day under current law), and wells with a completion depth of 2,000 feet or more and an average daily production of five barrels or less would be exempt (up from three barrels per day under current law).

Severance Tax Exemptions Expanded

The average daily production below which severance tax exemptions apply would be expanded to include wells of all depths, including those using tertiary-recovery and water-flood processes. Pursuant to a House Committee amendment, the low-production exemption threshold for gas wells also would be raised from $81 to $87 per day.

Residential Remodeling Sales Tax Exemption

Labor services associated with the reconstruction, restoration, remodeling, renovation, repair, or replacement of a residence would be exempt from the sales tax. "Residence" would be defined as "only those enclosures within which individuals customarily live."

Tax Lien Provisions

K.S.A. 79-3235 and 79-3617 would be amended with respect to tax liens to provide that if execution has not occurred within ten years, the warrants would become dormant.

Expansion of Machinery and Equipment Exemption

The property tax exemption for certain items of business machinery and equipment, including such equipment used by not-for-profit entities, would be expanded to exclude all items with a retail cost when new of $1,000 or less. Current law exempts all such items with a retail cost when new of $250 or less. The requirement that business machinery and equipment be actually and regularly used "exclusively" for business purposes in order to qualify for the exemption also would be relaxed such that it would only have to be used in the conduct of the owner's business.

Earned Income Tax Credit

A Kansas earned income tax credit (EITC) for individual income taxpayers would be enacted equivalent to 10 percent of amounts claimed under the federal EITC.

Sales Tax Exemptions

Besides the exemption for residential remodeling, a number of additional sales tax exemptions would be provided:

1. all purchases of 501 (c)(3) religious organizations, provided the tangible personal property and services are used exclusively for religious purposes;

2. sales of aircraft used "directly or through an authorized agent" as certified or licensed carriers in interstate commerce;

3. all sales of machinery and equipment used directly and primarily for producing broadcast signals or the failure of which would cause broadcasting signals to cease, as well as sales of electricity essential or necessary for the purpose of producing a broadcast signal or the failure of which would cause broadcasting to cease;

4. all sales by or on behalf of not-for-profit organizations providing nonsectarian comprehensive multi-discipline youth development programs;

5. all purchases and sales by or on behalf of parent-teacher associations or organizations;

6. fees charged by certain humanitarian organizations exempt from property taxation pursuant to K.S.A. 79-201 Ninth to allow participation by persons 18 years or younger in sports, games, or other recreational activities, as well as all dues charged by such organizations;

7. direct and indirect purchases of nonprofit zoos and nonprofit entities contracting to operate zoos;

8. sales of food for human consumption by a 501(c)(3) food distribution program which offers such food at a price below cost in exchange for the performance of community service; and

9. dues charged by certain veterans' organizations.

Tax Credits for Employment of Developmentally Disabled

Business firms which provide full-time employment for at least eight months for persons who are developmentally Disabled or mentally ill would be entitled to income, premium, or privilege tax credits of $500 per person, except that no more than $50,000 in credits could be claimed in any one year.

Food Sales Tax Rebates

The food sales tax rebate program would be expanded substantially and changed in a number of ways. The limitation of "total household income" of $13,000 would be replaced for 1998 with a new limitation of "Kansas adjusted gross income" of $25,000. The $25,000 would be indexed prospectively beginning in 1999. Taxpayers could claim the rebates on individual income tax forms as refundable credits or continue to claim the rebates by filing separately as provided under current law. The amount of the rebates would be changed such that $50 would be provided for every member of a qualifying household. Households headed by a single person with dependent children also would be entitled to an extra $50.

Standard Deduction Amounts Increased

The Kansas standard deductions for individual income taxpayers would be increased for tax year 1998 prior to being indexed prospectively beginning in tax year 1999. For tax year 1998, the increases would be as follows:

K.S.A. 79-213 would be amended to exempt from filing requirements at the State Board of tax Appeals owners of motor vehicles exempt from taxation because they are absent from the state due to military service.

Sales Tax Exemption Clarification

The sales tax law would be amended to clarify that business machinery and equipment would qualify for the exemption regardless of how it is treated for federal income tax purposes. (This would address the Alsop Sand decision.)

Education Savings Accounts

Taxpayers would be allowed to establish postsecondary education savings accounts beginning in tax year 1998 and deposit up to $2,000 for the account holder and up to $1,000 for each dependent child of the account holder, except that there would be no limit on deposits from earned income of a dependent child who is a recipient of Aid to Families with Dependent Children. All income earned on postsecondary education savings accounts would be exempt from the Kansas income tax. Taxpayers also would be allowed to subtract from their adjusted gross income the first $2,000 of contributions to such accounts for all tax years beginning in 1998.

Sales Tax Exemption Permit Authority

K.S.A. 79-3619 would be amended to authorize the Secretary of Revenue to adopt rules and regulations to provide for the issuance of permits to certain businesses which grant direct payment authority that allows certain purchases to be made without the payment of sales or use tax to the vendor or service provider and requires the permit holder to self-accrue state and local taxes and pay such taxes directly to the Department of Revenue.

Background

The inheritance tax, singles' income tax, machinery and equipment tax credits for property taxes paid, school finance property tax, and severance and property tax on oil provisions are identical to those recommended by the Governor.

The Governor had recommended a $100 increase in personal exemptions and had not in 1998 recommended the residential remodeling sales tax exemption (though he recommended an exemption for all remodeling labor services to the 1997 Legislature).

House Tax Committee amendments included:

1. prospective indexation of personal exemptions beginning in tax year 1999;



2. the increases in standard deduction amounts recommended by the Governor, coupled with prospective indexation of such amounts (not recommended by the Governor);



3. eliminating a Senate provision also recommended by the Governor which would have set the school finance levy at 23 mills in the 1999-2000 school year;



4. making permanent the $20,000 residential exemption from the school finance levy;



5. the provision relating to expanding the property tax exemption threshold for certain items of business machinery and equipment from $250 to $1,000;



6. the relaxation of the exclusive use requirement with respect to qualification for the low-cost-item property tax exemption;



7. the earned income tax credit provision;



8. the sales tax exemption for religious purchases;



9. the sales tax exemption for certain sales of aircraft;



10. the sales tax exemption for broadcast machinery and equipment;



11. the sales tax exemption for certain youth group sales;



12. the sales tax exemption for PTAs and PTOs;



13. the sales tax exemption for certain fees and dues of humanitarian organizations;



14. the sales tax exemption for zoos;



15. the provisions relating to expansion of the food sales tax rebate program;

1. the postsecondary education savings account provisions;



2. the filing requirement exemption for certain owners of motor vehicles who are serving in the military;



3. the sales tax exemption clarification regarding business machinery and equipment;



4. the sales tax exemption for certain nonprofit food distribution programs;



5. the tax credits for business firms which employ developmentally disabled persons;



6. the expansion of the severance tax exemption for natural gas; and



7. the tax lien dormancy provisions.

The House Committee of the Whole added the amendment authorizing the adoption of rules and regulations regarding the issuance of sales tax permits to certain businesses.

Another House Committee of the Whole amendment provided the sales tax exemption for veterans' organization dues.

A third House Committee of the Whole amendment is technical in nature.

The bill would reduce receipts as follows: