Tax relief
John Schlageck
Saturday, July 14, 2007
Production agriculture remains one of the most capital-intensive industries in this country.
Hours of operation are long, intense and the window of opportunity is often short and fleeting.
Profit margins are razor thin. Producers continually monitor the markets, look to manage their risk and seek to find an edge that will keep them productive and profitable.
One such measure that will help agricultural producers became law July 1. Those farmers, ranchers and landowners who belong to Farm Bureau in Kansas played a significant role in passage of a measure that raises the threshold for the Kansas franchise tax to $1 million of net worth in FY 2008 and phases the tax out in five years. The prior threshold was $100,000 of net worth.
Following the increase in the exemption threshold, the state will incrementally phase the tax out with a 25 percent reduction in FY 09, a 50 percent reduction in FY 10, a 75 percent reduction in FY 11 and complete elimination by 2012.
Franchise tax is the levy companies pay to do business in Kansas based on a corporation’s net worth. Passage of this legislation translates into $135 million in savings for businesses across the state by 2012, including many farm and ranch limited liability companies and partnerships. With many farms and ranches operating on narrow margins when compared to investment, absorbing this franchise tax has been a real burden to the bottom line of these family businesses — much more so than to large, publicly-traded companies.
In agriculture today, the rule rather than the exception remains increased production. With increased production comes increased operating costs including fuel, fertilizer, seed, herbicides, insecticides, etc. Increased production also means additional machinery and land. These all add up to an increased net worth and more franchise tax.
To be in the business of farming, there must be land. This land also contributes to net worth and as a result, this franchise tax was levied on property needed for making food, fuel and fiber.
For business purposes, many agricultural operations are organized under this structure of limited liability and limited partnerships. They have to be to grow and prosper. Many Kansas farming operations have multiple crops, sometimes several farms and often support two or even three generations of a family. Each was subject to this franchise tax — each subjected to this additional tax burden.
This tax was unfair to capital-intensive businesses. The Kansas franchise tax amounted to essentially another form of property tax on Kansas landowners, farmers and ranchers.
No one would argue it’s in our state’s best interest to have a healthy, vibrant economy — one that encourages creation of jobs, income and wealth. With the elimination of the franchise tax, this state no longer has a roadblock that discourages growth and penalizes accumulation of assets.
This franchise tax was nothing more than an annual bill for the privilege of doing business in Kansas, unrelated to realized income, profitability or productivity. It will no longer be an economic disincentive for businesses who may be contemplating expansion or locating in this state.
With this phase out, there will be a beneficial fiscal impact. With this more favorable tax policy, Kansas has the potential to attract new businesses. Elimination of this deterrent to growing assets will stimulate new economic growth and increased opportunities in a state desperately needing them.
Simply put, Kansas has done away with a bad tax that hampered small business, farming and landowners in Kansas.
F John Schlageck is a leading commentator on agriculture and rural Kansas. Born and raised on a diversified farm in northwestern Kansas, his writing reflects a lifetime of experience, knowledge and passion.