Division of the Budget
Landon State Office Building Phone: (785) 296-2436
900 SW Jackson Street, Room 504 adam.c.proffitt@ks.gov
Topeka, KS 66612 Division of the Budget http://budget.kansas.gov
Adam Proffitt, Director Laura Kelly, Governor


March 17, 2021
REVISED

The Honorable Adam Smith, Chairperson
House Committee on Taxation
Statehouse, Room 185A-N
Topeka, Kansas 66612
Dear Representative Smith:
SUBJECT: Revised Fiscal Note for HB 2421 by House Committee on Taxation
In accordance with KSA 75-3715a, the following revised fiscal note concerning HB 2421
is respectfully submitted to your committee.
HB 2421 would exclude unemployment compensation benefits from gross income if the
benefits were secured with a fraudulent identity and the taxpayer did not receive the benefits.
These benefits would not be subject to Kansas income taxes after the Department of Labor
determines the benefits were obtained fraudulently by another individual.
Calculations for Kansas income taxes are based on the Kansas adjusted gross income,
which is calculated by adding or subtracting certain types of income from the federal adjusted
gross income. The bill would allow the amount of disallowed business interest expenses to be
subtracted from income for Kansas income tax purposes beginning in tax year 2021. Additionally,
all deductions from the carry forward amount of disallowed business interest would be added back
for Kansas income tax purposes beginning in tax year 2021. This would allow state taxpayers to
claim the full amount of business interest expenses on state income tax returns.
The bill would allow 100.0 percent of global intangible low-taxed income (GILTI), before
allowable deductions, to be subtracted from income for Kansas income tax purposes beginning in
tax year 2021. This would exempt this income from state income taxes.
The bill would allow the amount of disallowed meal expenses to be subtracted from income
for Kansas income tax purposes beginning in tax year 2021. This would allow state taxpayers to
claim the full amount of meal expenses on state income tax returns.
The bill would allow the amounts received from the federal Paycheck Protection Program
(PPP) under the CARES Act to be subtracted from income for Kansas income tax purposes
beginning retroactively in tax year 2020, if these amounts were included in the taxpayer’s federal
The Honorable Adam Smith, Chairperson
Page 2—REVISED HB 2421

adjusted gross income. All amounts included in the taxpayer’s federal adjusted gross income
would be exempt from state income taxes. The bill provides that the expenses from PPP loans that
are not allowed as a deduction in determining federal adjusted gross income would be allowed to
be subtracted from income for Kansas income tax purposes beginning retroactively in tax year
2020.
Under current law, a taxpayer is only allowed to use itemized deductions on a state income
tax return if they also use itemized deductions on the federal income tax return. The bill would
allow taxpayers to use itemized deductions on the state income tax return regardless if they use
itemized deductions on federal income tax return beginning in tax year 2021.
Corporate taxpayers would be allowed to exclude contributions to capital from non-
shareholders in the calculation of state income taxes beginning in tax year 2021. This provision
would exclude contributions by a governmental entity or civic group such as the values of state
and local tax incentives from the calculation of income.
Deferred foreign income (federal repatriation) would be classified as foreign dividends
qualifying for the 80.0 percent deduction. The bill would allow taxpayers to deduct the costs of
any disallowed Federal Deposit Insurance Corporation (FDIC) premiums beginning in tax year
2021. This would exempt this income from state income taxes.
Under current law, Kansas corporations, banks, trust companies, and savings and loans can
claim the Kansas expensing deduction for investments in qualifying machinery and equipment that
are placed into service in Kansas for tax year 2014 and each future tax year. The bill would also
allow individual income taxpayers to claim the expensing deduction beginning in tax year 2021.
All taxpayers claiming the Kansas expensing deduction would be required to offset the costs of
the expensing deductions claimed on the federal return with Section 179 of the Internal Revenue
Code.

Estimated State Fiscal Effect
FY 2021 FY 2021 FY 2022 FY 2022
SGF All Funds SGF All Funds
Revenue -- -- ($118,800,000) ($118,800,000)
Expenditure -- -- $421,761 $421,761
FTE Pos. -- -- -- 3.00
The Department of Revenue estimates that HB 2421 would decrease State General Fund
revenues by a minimum of $118.8 million in FY 2022, $125.6 million in FY 2023, and $130.5
million in FY 2024. Given that the Department of Revenue does not have data to make estimates
of some of the tax policy changes, the fiscal note of the bill is likely to be higher. The estimated
fiscal effect by specific tax policy change would be as follows:
The Honorable Adam Smith, Chairperson
Page 3—REVISED HB 2421

Tax Policy Change FY 2022 FY 2023 FY 2024
UI Fraud $ -- $ -- $ --
Disallowed Business Interest (30,600,000) (37,500,000) (38,600,000)
GILTI (24,200,000) (23,500,000) (23,700,000)
Disallowed Meal Expenses -- -- (3,100,000)
PPP Unknown Unknown Unknown
Itemized Deductions (65,000,000) (65,700,000) (66,300,000)
Capital Contributions Negligible Negligible Negligible
Deferred Foreign Income -- -- --
FDIC (1,300,000) (1,300,000) (1,300,000)
Expensing Deduction 2,300,000 2,400,000 2,500,000
Total ($118,800,000) ($125,600,000) ($130,500,000)
The Department of Labor and the Department of Revenue both indicate that the provision
of the bill that allows taxpayers to exclude fraudulent unemployment compensation benefits from
gross income would have no fiscal effect. Victims are not held accountable for taxes on
unemployment compensation benefits related to identity theft.
To formulate the estimates related to decoupling from the Tax Cuts and Jobs Act of 2017
or the CARES Act, the Department of Revenue indicates that it used information from the federal
Joint Commission on Taxation to estimate the impact of all federal tax policy changes on Kansas.
The Department does not have any data to estimate the fiscal effect of allowing individual
taxpayers the ability to deduct GILTI income before any deduction. The Department is unable to
determine the impact of the PPP provisions because it is unclear the amount of the loans that will
not be forgiven at the federal level. In addition, language in the bill would only apply to PPP loans
provided by the CARES Act, but it would not apply to PPP loans under the Consolidated
Appropriation Act, 2021. To formulate the estimates on allowing taxpayers to use itemized
deductions on a state income tax return regardless if they use itemized deductions on the federal
income tax return, the Department reviewed data on standard and itemized deductions from tax
year 2017. Federal tax reform has enticed more federal standard deduction users through the
raising of the standard deduction and the limit on itemized deductions.
To formulate the estimates on allowing expensing for individual income taxpayers and
requiring the Section 179 of the Internal Revenue Code offset, the Department of Revenue
reviewed data from tax year 2012, which was the last tax year that individual income taxpayers
were allowed to claim the expensing deduction. The exclusion of certain contributions to capital
would reduce State General Fund receipts by a negligible amount. Deferred foreign income is
already treated as foreign dividends and qualifies for the 80.0 percent deduction, so this provision
would have no fiscal effect. Meal expenses are currently allowed to be to be subtracted from
income at the federal level for tax year 2021 and tax year 2022, so this provision would have no
fiscal effect on state income tax receipts until tax year 2023 or FY 2024.
The Department of Revenue indicates that it would require a total $421,761 from the State
General Fund in FY 2022 to implement the bill and to modify the automated tax system. The bill
would require the Department to hire 3.00 new FTE positions to review, process, and audit
additional income tax returns. The required programming for this bill by itself would be performed
by existing staff of the Department of Revenue. In addition, if the combined effect of
The Honorable Adam Smith, Chairperson
Page 4—REVISED HB 2421

implementing this bill and other enacted legislation exceeds the Department’s programming
resources, or if the time for implementing the changes is too short, additional expenditures for
outside contract programmer services beyond the Department’s current budget may be required.
The Department of Administration indicates that adjusting state income tax collections has
the potential to have a fiscal effect on the amount of revenue collected from its debt setoff program.
This program intercepts individual income tax refunds and homestead tax refunds and applies
those amounts to debts owed to state agencies, municipalities, district courts, and state agencies in
other states. Debts include, but are not limited to child support, taxes, educational expenses, fines,
services provided to the debtor, and court ordered restitution. As the dollar amounts of refunds
are increased, the amount available for possible debt setoffs is also increased. However, the
Department is unable to make an estimate of the amount of additional debts setoffs that will be
intercepted as a result of the bill.
A provision in the federal American Rescue Plan Act of 2021 (ARP) prohibits states or
territories from using the federal funds appropriated from ARP “to either directly or indirectly
offset a reduction in the net tax revenue of such State or territory resulting from a change in law,
regulation, or administrative interpretation during the covered period that reduces any tax (by
providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the
imposition of any tax or tax increase.” If the state fails to comply with this provision by
implementing a reduction of net tax revenue through tax year 2024, the U.S. Treasury would be
required to recoup ARP funds in the amount of the net tax revenue reduction. If ARP funds are
not available, it is presumed that the State General Fund would be used to reimburse the U.S.
Treasury. In the original fiscal note issued, the ramifications of the passage of ARP were unknown.
Any fiscal effect associated with HB 2421 is not reflected in The FY 2022 Governor’s Budget
Report.


Sincerely,

Adam Proffitt
Director of the Budget

cc: Lynn Robinson, Department of Revenue
Bobbi Mariani, Insurance
Dawn Palmberg, Department of Labor
Jeff Scannell, Department of Administration


Statutes affected:
As introduced: 79-32