Between 2012 and 2015, the majority of new jobs in Kansas were LLCs, sole proprietorships, and Sub S-Corps. Specifically, most of Kansas’ job growth came in the form of businesses that currently receive an LLC-tax incentive.
Tax-incentivized entities, also known as pass-through businesses, LLCs, Sub S-Corps and sole proprietorships, created 98 percent of all new jobs in Kansas in 2015. U.S. Census data shows LLCs and other tax-incentive entities added more than 18,000 jobs in 2015, the latest year for which the data is available. Other private employers decreased staffing.
The Kansas Legislature reformed the state’s tax policy in 2012. The policy exempted LLCs and other pass-through entities like sole proprietors from income taxes, though the individuals who work for those entities continue to pay individual income taxes.
In the two years before the 2012 tax reform, pass-through jobs increased by 2.4 percent. In the two years after the tax cuts, pass-through employment increased by 8.4 percent. In 2013 and 2014, exempted entities accounted for 82 percent of all private sector job growth.
The LLC tax exemption is a hotly contested tax policy. Two of the country’s largest tax policy think tanks differ on Kansas’ 2012 tax reform. Officials at Americans for Tax Reform say Kansas tax cuts are working. While the American Tax Foundation argues the pass-through exemption encourages tax avoidance without generating desired growth.
The 2012 tax policy was a central issue in many legislators’ campaigns in 2016. However, legislators have never been able to eliminate the tax exemption in a clean bill. Since 2012, the Kansas Legislature twice failed to eliminate the LLC-exemption in clean bills. Legislators voted to repeal the exemption in 2014 and again in 2016. Both measures failed when moderate Republicans and Democrats voted against rolling back the 2012 LLC-tax incentive.
Those voting against revoking the exemption in 2016 include then-House members: Barbara Bollier, Tom Burroughs, Sydney Carlin, Stephanie Clayton, Diana Dierks, John Doll, Blaine Finch, Gail Finney, Stan Frownfelter, Broderick Henderson, Jerry Henry, Larry Hibbard, Don Hill, Don Hineman, Roderick Houston, Russell Jennings, Annie Kuether, Tom Moxley, Tom Phillips, Melissa Rooker, Kent Thompson, Brandon Whipple, John Wilson, and Valdenia Winn.
Many of the same House members voted in favor of rolling back the LLC-exemption in 2017 as part of a larger tax package that included retroactively increasing individual income tax rates on all Kansans with taxable income of more than $15,000 per year. Gov. Sam Brownback vetoed the measure, and the Senate sustained his veto.