TOPEKA — Gov. Sam Brownback’s push to keep cutting income tax rates passed a critical test in the Republican-controlled Senate on Wednesday, but not without some big changes.
Appeasing angry real estate agents, senators voted to phase out most income tax deductions as income tax rates are reduced, instead of eliminating the mortgage interest deduction as Brownback had proposed.
Meanwhile, several Republicans who voted against increasing the state’s sales tax in 2010 took a new stance and approved continuation of six-tenths of a cent sales tax to avoid dramatic budget cuts caused by phasing out one of the state’s primary income streams.
The Senate approved the newly-assembled plan on a voice vote. A final on-the-record vote comes Thursday.
A final tax-cut package is likely to emerge from negotiations between the Senate, which appears to favor Brownback’s approach, and the House, which plans to consider an alternative plan that lets the sales tax increase expire as scheduled in July.
Senate President Susan Wagle, R-Wichita, said the world is changing, people are more mobile and they’re moving to low- or no-income-tax states.
“This is progressive tax policy that’s going to grow our state,” she said during a wide-ranging, five-hour debate that churned into the night.
Some conservatives wanted a simpler tax cut that would have sharply cut state spending
Sen. Dennis Pyle, R-Hiawatha, criticized Brownback’s plan because it brings in more state revenue by continuing the sales tax and by taking away some tax deductions. He pushed to cut rates but also let the sales tax expire and retain deductions, which would force deeper cuts in state spending.
“If you want to stop the bath tub from running over, you shut off the water,” he said. “My intention is to truly limit government.”
Brownback’s proposal largely aims to fix budget problems stemming from hastily approved income tax cuts signed into law last year while also pushing rates down more.
Raw emotions lingering from the 2012 tax-cut fight peppered the debate. Conservatives decried last year’s moderate Republican leadership and Democrats assailed Republicans as backing irresponsible tax cuts sure to cause budget cuts that would damage schools and essential services.
Democrats said the plan disproportionately hurts the neediest Kansans by extending the sales tax and ditching deductions.
“We’re going to impose a self-inflicted budget crisis on ourselves,” Senate Minority Leader Anthony Hensley said. “That’s what we did last year, and we’re only going to compound that this year. I really do not understand it.”
Hensley read excerpts from the 2010 debate that led to the sales tax increase, essentially calling out Republicans who opposed it three years ago but now support it to accommodate income tax cuts.
Many of those Republicans said their constituents have told them they’re not concerned with the sales tax and want the state to drive down income tax rates and cut government spending. Others said the sales tax is necessary to prevent painful cuts to schools.
“Without this major piece of this puzzle, the whole picture does not work,” Sen. Les Donovan, R-Wichita, said.
The sales tax was increased to 6.3 percent in 2010 to help balance the budget during the recession. It is set to decline to 5.7 percent in July.
Sen. Carolyn McGinn, R-Sedgwick, sought to let the sales tax increase expire on time.
“This Legislature made a promise … and I intend to keep it,” she said.
The proposal failed on a 17-23 vote.
Although most tax deductions would be phased out, senators voted to keep the charitable donation tax deduction. They voted to prevent people from deducting gambling losses on their taxes, which would let the state keep about $6 million more in revenue each year.
Democrats and Republicans tried to restore some of the credits and deductions eliminated last year, including the food sales tax rebate that benefits the working poor, a tax credit that helps people with disabilities build ramps to access homes or businesses and a credit that benefits people who are caring for disabled friends or relatives.
Those attempts failed on a series of closed votes.
Sen. Ty Masterson, R-Andover, who proposed phasing out deductions, said his plan forces some budget cuts but otherwise could leave the state in relatively good fiscal shape until 2018, when more changes would be needed.
The tax-cut plan, paired with Brownback’s proposed budget and $50 million in additional cuts, would allow the state to maintain a relatively strong ending balance that’s close to the 7.5 percent balance Brownback wants, according to an early analysis by the nonpartisan Legislative Research Department.
But changes to the bill make it difficult to predict its impact on future budget, research officials warned.
The Senate will have a final vote Thursday. The House, meanwhile, is poised to debate its alternative plan that would limit spending by the state, sending anything beyond 2 percent revenue growth to a fund that would drive down income tax rates.
It would let the sales tax expire, a feature House Republican leaders say is critical to the plan getting support in their chamber. But some say it wouldn’t drive down rates fast enough to spur strong economic growth
That plan passed a committee but hasn’t been debated by the House.
The evolving plan
Under Brownback’s plan, the lowest bracket for income tax rates would fall from 3 percent to 2.5 percent in 2014 and to 1.9 percent in 2016. The top bracket income tax rates would fall from 4.9 percent to 3.5 percent in 2017.
Starting in 2016, the state would channel any revenue growth beyond 4 percent toward a fund that would help further reduce income taxes. Eventually, Brownback plans to eliminate income taxes.
Those proposals are included in the bill the Senate has tentatively approved.
Early projections by state researchers show Brownback’s proposal would erode the state’s savings to below the 7.5 percent ending balance next year and force $500 million in budget cuts. Democrats contend the proposal forces big cuts that are certain to include cuts to schools, which a district court has already ruled are funded at an unconstitutionally low level.
Conservative Republicans who lead the Senate, however, say they’re prepared to make deep budget cuts to accommodate the income tax cuts they believe will lead to robust economic growth that translates to increasing business activity and jobs.
The idea that cutting income taxes creates strong job growth is inaccurate, according to an analysis of multiple studies by Michael Mazerov, a senior fellow at the liberal-leaning Center on Budget and Policy Priorities.
The cuts don’t leave most business owners with enough money to add jobs, and he said big income tax cuts can erode public services and deter some businesses from moving to the state.
Rugged road to tax cuts
Last year, Brownback signed into law a drastically altered version of his original income tax cut proposal.
The governor’s preferred plan would have zapped some tax credits and deductions to bring in more tax money to make up for cutting rates for all income taxpayers and eliminating income tax on the profits of most businesses and farms.
It would have extended the six-tenths of a cent sales tax lawmakers approved in 2010.
Moderate Republicans who then controlled the Senate balked at the plan and voted to keep a few of the most popular tax credits and deductions, which increased the plan’s price tag dramatically. Then a series of esoteric political maneuvers led to a quick vote in the House that sent the reshaped bill to Brownback’s desk, where it sat as the governor hoped an alternative would emerge.
Brownback said he was disappointed, but he signed the bill into law anyway, saying the state needed tax cuts to jumpstart its economy. The state can make it work, he said.
But the new law led to projected budget shortfalls starting next year. Brownback started 2013 by pitching a new plan to help avoid big cuts to state services. He and conservative Republican allies also helped oust several moderate Republican senators last year, creating a Senate more open to deep budget cuts and tax reduction.