In Kansas, a company seeks to avoid paying property and sales taxes, again.
In a bill moving through the Kansas Legislature this year, the owner of Genesis Health Clubs seeks to avoid paying property taxes. This bill has passed the House of Representatives and is awaiting Senate approval, which seems likely. In an earlier bill which has been incorporated into the current bill, the Division of the Budget was unable to supply an estimate of the bill’s cost. (1)The Department of Revenue estimates that the bill would decrease state and local sales tax revenues by unknown amounts beginning in FY 2024. … The League of Kansas Municipalities and the Kansas Association of Counties indicate that the bill has the potential to decrease local property and sales tax revenues that are used in part to finance local governments. The League estimates that more than 20.0 percent of its property tax revenue is tied to businesses that could qualify for this exemption. The League is unable to determine how many businesses would qualify for the property and sales tax exemption but indicates it could result in the loss of millions of dollars to cities. The Association indicates the bill has the potential to shift property tax burden to residential property taxpayers or other businesses not receiving this property tax exemption. The bill also has the potential to reduce revenues that are pledged to repay STAR bond projects; however, it is unknown what impact this bill would have on the viability of those projects. Fiscal Note for SB 252, http://kslegislature.org/li/b2023_24/measures/sb252/
The same company and its owners have tried this before. In 2014, I explained how granting this exemption was a bad idea. In 2021, Steven tried again.
What has changed since then? This exemption is still a bad idea for reasons of public policy. Additionally, Brandon Steven, the owner of the health clubs, plead guilty to a gambling charge and forfeited one million dollars in earnings. His sentence of probation was a factor in not receiving Paycheck Protection Program loans during the pandemic. In asking a federal court to end his probation early, Steven argued: “However, due to the economic downturn caused by the COVID-19 pandemic, Defendant has furloughed 3,941 employees and fears more are soon to follow. Defendant argues but for his status as a federal probationer, his businesses may be eligible for PPP funds.” The court denied his application.
At one time, some of the companies owed a lot of the tax it seeks to avoid.
More recently, the city of Wichita, which had contracted with Genesis for management of the city’s indoor ice rink, nixed that arrangement. The Wichita Eagle reported: “The Wichita City Council took that action after hearing from a parade of users of the facility with a litany of complaints of lack of maintenance and unpaid bills.”
Opinion from the Wichita Eagle is at Legislature to Kansans: Pay property taxes so Genesis Health Clubs doesn’t have to.
Following, my article from March 2014.
Special interests struggle to keep special tax treatment
When a legislature is willing to grant special tax treatment, it sets up a battle to keep — or obtain — that status. Once a special class acquires preferential treatment, others will seek it too.
When preferential tax treatment is granted, that is, when government says someone doesn’t have to pay taxes, it’s usually the case that someone else has to pay. That’s because governmental bodies usually don’t reduce their spending in response to the tax breaks they give. Spending stays the same (or rises), but someone isn’t paying their share. Therefore, others have to make up the missing tax revenue.
In Kansas, SB 72 has been passed by the Senate and may be considered by the House of Representatives. This bill would, according to its supplemental note “provide a property or ad valorem tax exemption on all property owned and operated by a health club.” In effect, this bill would give all health clubs the same property tax exemption that the YMCA enjoys on its fitness centers.
When the legislature uses tax law to achieve goals, the statute book becomes complicated as illustrated by the many special sales tax exemptions in Kansas. K.S.A. 79-3606 details the special sales tax exemptions that the legislature has granted. In order to list them all, the statute has sections labeled from (a) through (z), then from (aa) through (zz), then from (aaa) through (zzz), and finally from (aaaa) through (gggg).
Some of these sections are needed and valuable, such as the section that exempts manufacturers from paying sales tax on component parts and ingredients used to build final products. It is supposed to be a retail sales tax, after all.
But then there are sections like this: “(vv) (18) the Ottawa Suzuki Strings, Inc., for the purpose of providing students and families with education and resources necessary to enable each child to develop fine character and musical ability to the fullest potential.”
I have no doubt that this organization is engaged in useful work and that there should be more of this. But what about all the other organizations engaged in similar activities, and which are undoubtedly as deserving of the same tax break? Should they be penalized because they did not have the temerity to ask?
In the area of property taxation, we find many similar circumstances, where two businesses that seem to be similarly situated are treated very differently by the tax collector.
For example, Wesley Medical Center, one of Wichita’s principal hospitals, is Wichita’s second-largest property taxpayer, with taxable assessed value representing 0.90 percent of the total of such property in Wichita.
But another large Wichita Hospital, Via Christi Hospital on St. Francis, has assets valued at over $115 million, yet pays no property tax. For the mill levy rate that applies to its address, this represents about $3.5 million in property tax savings. (It did pay a Sedgwick County Solid Waste User Fee of $8.91.)
How can we meaningfully distinguish between Wesley and St. Francis Hospitals? Does one provide more charity care than the other? Does the non-profit hospital charge lower rates? (I’d be surprised if so.) Does St. Francis impose less of a burden on city and county resources such as fire and police protection than does Wesley? Since Wesley attempts to earn a profit and St. Francis purportedly does not, does that make Wesley evil and St. Francis saintly? Why do we exempt St. Francis from millions of property tax, yet insist it pay $8.91 in solid waste user fees?
We find other examples: A luxury retirement community (Larksfield Place) with real property valued at $27,491,440 pays no property tax, except for $5.95 in the solid waste user fee. Less than a mile away, Sedgwick Plaza, a senior living center, has a valuation of $5,067,350 for its real property, and was billed $70,080.51 in property tax, including its solid waste user fee of $972. Despite — or perhaps due to — its non-profit status, Larksfield Place is able to provide its president a salary of over $130,000.
A Goodwill thrift store on West Central in Wichita has real property valued at $696,600, but paid no property taxes except for $5.94 solid waste user fee. On the other side of town, a small thrift store on East Douglas has real property valued at $113,800. It pays $3,437 in property tax, including its solid waste user fee.
These differences in what seem to be properties in similar situations are not justifiable under any theory of taxation, one of which is that similar situations are taxed similarly. The YMCA’s fitness centers are difficult to distinguish from others in Wichita — except for the YMCA’s rarefied tax-exempt status.
The slippery slope
Here’s the danger: Should SB 72 pass and all health clubs start enjoying the same tax privileges as the YMCA, shouldn’t we then expect to see for-profit hospitals like Wesley Medical Center ask to be relieved of their tax burden, using the same logic? If the legislature were to deny that request, how could it possibly explain its reasoning to citizens?
In defense of its tax exempt status, the YMCA says it engages in many charitable activities. I’m sure that’s true, and we’d like to keep those activities. Perhaps the YMCA would consider separating its fitness centers from the rest of its operations. Separate the business-like activities from the charitable. The YMCA can use the “profits” from its fitness centers to finance its charitable activities. To the extent it does that, it will avoid paying state and federal income tax on its profits.
But property taxes are something different from income taxes. The YMCA benefits from all the things the city (and other taxing jurisdictions) provide, ranging from public safety to schools to security for the mayor’s trip to Ghana. When it doesn’t pay its share, others have to pay. That means that others — you and me, for example — have less money available for the charitable (and other) activities they feel important. Even worse, I am forced to subsidize the charitable activities that the YMCA (or the Methodist Church, Boy Scouts, Girl Scouts, etc.) chooses to fund. This is especially true in Kansas, where low-income households pay a regressive sales tax on food.
When the YMCA — or any non-profit, for that matter — escapes taxation that other similar organizations must pay, it means that we all subsidize the charitable activities of these non-profits. It sustains a system in which special interest groups lobby to keep their advantages, and those who are not similarly blessed spend lavishly on campaign contributions and other lobbyists. Even when the organization is widely respected, as is the YMCA, this is wrong. It leads to cynicism as citizens realize that our laws are not applied uniformly, and that special interests feel they can buy their way to special treatment.
For their business-like activities, the YMCA, Larksfield Place, and Goodwill thrift stores should pay property taxes so they shoulder the same burden that the rest of us struggle under. That will spread the cost of government fairly, and let ordinary people themselves decide how to contribute their after-tax dollars.
|↑1||The Department of Revenue estimates that the bill would decrease state and local sales tax revenues by unknown amounts beginning in FY 2024. … The League of Kansas Municipalities and the Kansas Association of Counties indicate that the bill has the potential to decrease local property and sales tax revenues that are used in part to finance local governments. The League estimates that more than 20.0 percent of its property tax revenue is tied to businesses that could qualify for this exemption. The League is unable to determine how many businesses would qualify for the property and sales tax exemption but indicates it could result in the loss of millions of dollars to cities. The Association indicates the bill has the potential to shift property tax burden to residential property taxpayers or other businesses not receiving this property tax exemption. The bill also has the potential to reduce revenues that are pledged to repay STAR bond projects; however, it is unknown what impact this bill would have on the viability of those projects. Fiscal Note for SB 252, http://kslegislature.org/li/b2023_24/measures/sb252/|