Among the nearly 334,000 Kansas businesses that owe no state income taxes thanks to the Brownback administration’s 2012 tax cuts is one called BCLT II, LLC.
BCLT II happens to be owned by Bill Self, the legendary University of Kansas men’s basketball head coach.
Under his 2012 contract with KU, Self pulls down a salary of $230,000 a year. But that’s just a small part of his compensation.
He also gets at least $2.75 million annually for “professional services rendered,” including “educational, public relations, and promotional duties as assigned by the athletics director.
That $2.75 million is paid to BCLT II (the name comes from the first initials of Self and his family) by Kansas Athletics Inc., the entity that operates intercollegiate sports for KU. Which means that Self, who owes his employment to the state of Kansas and is the state’s highest paid employee, owes no Kansas income taxes on the bulk of his pay.
Before Gov. Sam Brownback signed the tax cuts, the top tax bracket was 6.45 percent. At that rate, Self would have owed up to $177,375 annually in Kansas income taxes. Even under the current reduced top rate of 4.6 percent, he’d have owed up to $126,500.
The tax cuts not only did away with Kansas income taxes on LLCs; it eliminated state income taxes on all so-called pass-through businesses, including Subchapter S corporations, partnerships and sole proprietorships, not to mention farms, mineral interests, patent royalties and independent contractor income.
Brownback boasted that some 191,000 business owners would benefit from the exemption, providing the economy with “a shot of adrenaline” that would stimulate the creation of thousands of new jobs.
Nearly three-and-a-half years after the cuts took effect, the number of Kansas businesses owing no state income taxes has swelled to about 334,000. Meanwhile, the forecasted job growth has yet to materialize.
“If they passed a provision like this in Washington, D.C., where I live and work, I would go to my employer the next day and ask them to start paying me as an independent contractor,” Scott Drenkard, an economist with the conservative Tax Foundation, testified before the Kansas House Committee on Taxation a couple of months ago.
“I would still be doing the same job and contributing the same value to the economy,” he told the panel, which was considering a bill to eliminate the income tax exemption. “I just wouldn’t be paying any income taxes.”
Few would dispute that Self is a great basketball coach or, for that matter, that he contributes in many ways to the state. But few would argue that, as a result of the 2012 tax exemption, Self has created any jobs.
“I actually think I would expand that out and say it’s far-fetched to think that a lot of individuals or entities registered as LLCs or who benefit from this are in the position to create jobs,” says Annie McKay, executive director of the Kansas Center for Economic Growth, a liberal-leaning research organization.
“I would say a significant number of beneficiaries of this part of the tax policy are not now nor will they ever be in a position to create jobs, no matter the size of the benefit,” she says.
In fairness, Self formed his LLC years before the Legislature passed the tax reductions – he’s had it since he was head coach at the University of Illinois, his last stop before taking the plum job at KU. And his ability to avoid paying Kansas income taxes is, of course, perfectly legal.
But his contract illustrates the inequity of a law that exempts millionaires like him from paying state income taxes while a school teacher making, say, $69,000 annually owes the state about $2,190.
“The fact of the matter is, those people and any other higher income people who have taken advantage of what is in fact legislative policy is not inappropriate at all,” says Jim Zakoura, an Overland Park lawyer and a critic of the tax cuts who testified before the House Committee on Taxation in March.
“The inappropriateness is the Legislature which created that and which actually greatly contributed to inequality of income and taxation throughout the state.”
KU Athletics referred questions about Self’s LLC to the university’s communications department, which did not respond to several requests for comment. Self’s attorney, Tulsa, Oklahoma, lawyer Stuart D. Campbell, also declined to talk about it, citing attorney-client privilege.
Self not alone
Self is not the only KU coach who gets compensated both as a salaried employee and as an independent contractor via an LLC. KU head football coach David Beaty receives a salary of $225,000 a year, various incentive payments (including $25,000 for each Big 12 regular season win) and “not less than” $575,000 annually through his LLC, DB Sports LLC, for “multimedia activities and services.”
So while Beaty, like Self, presumably owes state income taxes on his salary, he owes none on his LLC income. Unlike Self, however, Beaty, who was an assistant coach at Texas A&M before coming to Kansas, signed his deal and created his LLC well after the tax cuts were enacted. Records with the Kansas Secretary of State’s office show DB Sports LLC was formed in March 2015, just days before he signed his multimedia services agreement with KU.
“It's bizarre. But so much is bizarre about the compensation of college coaches,” says Marc Edelman, a sports law expert and an associate professor of law at Baruch College’s Zicklin School of Business in New York. “Without understanding the tax nuances behind it, it just goes to show the extreme bargaining power that big-time college coaches have over their universities.”
“Simply stated,” Edelman says, “one would never expect to see an arrangement like this with respect to a university professor, chancellor or even university president.”
Edelman suggests that colleges may have an incentive to give coaches money through tax benefits rather than direct pay so as to make it appear their compensation is lower than it actually is.
“Colleges with big-time sports have two conflicting incentives,” he says. “One is to offer the best financial package to their college coaches to induce them to come to their school instead of a rival school. At the same time, however, university systems want to make the salary of their college coach look as low as possible, because as a matter of equity it looks absurd to the public when college coaches make upwards 100 times per year the salary of some university professors.”
Another Kansas coach who, like Self and Beaty, is treated as both a salaried employee and independent contractor is Kansas State University head football coach Bill Snyder. His contract with K-State Athletics Inc. calls for him to be paid a salary of $1.83 million in the 2016-2017 season. But under a separate licensing agreement that allows K-State to use his name and likeness (K-State’s football stadium is named Bill Snyder Family Stadium), he gets paid $1.22 million through a separate corporation, SSM Inc.
K-State did not respond to several requests for comment on Snyder’s pay package and whether the $1.22 million is subject to Kansas income tax.
The treatment of Self, Beaty and Snyder as both employees and independent contractors who don’t have to (or in Snyder’s case may not have to) pay state income taxes on a substantial chunk of their pay stands in contrast to the treatment accorded other Kansas college coaches.
For example, Wichita State University’s men’s basketball head coach Gregg Marshall inked a deal last year paying him $3 million annually, making him among the highest paid coaches in college basketball. And K-State’s men’s basketball head coach Bruce Weber signed a deal in 2012 that calls for him to be paid $1.9 million this season.
Neither gets paid additional money through an LLC or other pass-through businesses – although, like their fellow coaches, they get a host of fringe benefits like courtesy cars and country club memberships. Presumably, both pay Kansas income taxes on their salaries.
Whether the 2012 tax cuts were intended to benefit millionaire coaches like Self doesn’t appear to concern Kansas legislators like Rep. Ron Ryckman Jr., a Republican from Olathe who chairs the House Appropriations Committee.
“The overall tax strategy is to lower taxes and have a way to stimulate the economy,” Ryckman says.
“We are very fortunate to have Bill Self as the coach at KU and not the head coach of the Oklahoma Thunder,” he adds. “I don’t know his motivation for staying, but I do know that tax policy does drive decisions.”
That’s not the view of Senate Minority Leader Anthony Hensley, a Democrat from Topeka.
The tax cuts, he says, were supposed to create jobs and “obviously, Bill Self isn’t creating jobs by receiving that much of a tax break.”
“I like Bill Self,” Hensley says. “He’s a great coach. KU people, obviously, like him very much. But it’s bad policy when you’ve got the highest paid state employee in the state not paying any income taxes into the state of Kansas.”
Says McKay, of the Kansas Center for Economic Growth: “So is it the ultimate unintended consequence? I think for some folks it might be. I think for others, they see it in a large basket of unintended consequences, unintended outcomes.”
Dan Margolies, editor of the Heartland Health Monitor team, is based at KCUR. You can reach him on Twitter @DanMargolies.