House Republican leaders rolled out an alternative tax reform plan Friday as the political difficulties of moving Gov. Sam Brownback’s proposal through the Statehouse emerged.
The House plan would cap the growth of state spending at 2 percent and use any excess revenue to reduce individual income tax rates, with emphasis on cutting rates for the low- and middle-income tax brackets the fastest.
Since the plan depends on revenue growth beyond 2 percent, there’s no guarantee for rate reductions.
House Speaker Mike O’Neal made clear that Republican leadership likes the governor’s vision for reduced individual income taxes for Kansans and elimination of some taxes for small businesses. But the House plan leaves out major pieces of Brownback’s proposal that made some Republicans uncomfortable.
The House pitch jettisoned Brownback’s controversial plan to remove several tax deductions and credits, including a mortgage interest deduction, historic tax credits and the food sales tax refund. It would, however, eliminate the earned income tax credit and redirect that money to leverage more federal funding of Medicaid, an idea in the governor’s proposal.
The House Republicans’ plan would drop the state’s sales tax rate to 5.7 percent in July 2012, as scheduled.
Brownback had proposed keeping the rate at 6.3 percent indefinitely. That presents a political difficulty for many lawmakers who promised the increase would be temporary when they voted for it in 2010.
House Republicans would retain Brownback’s elimination of nonwage income tax for many small businesses, including limited liability companies large and small, sole proprietorships and subchapter S corporations. State corporate income tax would be untouched.
It’s unclear how much the proposal would cost. Republicans said they expect to see projections next week.
O’Neal said he hopes the House Republican plan complements Brownback’s ideas and whatever comes out in the Senate.
“There may be three different roads that all lead to that same destination coming from different angles,” he said.
Brownback plan has some critics
Brownback’s plan has faced waves of criticism since he unveiled it in his State of the State address 10 days ago. Earlier this week, Department of Revenue projections showed it would result in an average tax increase of $156 a year for people earning less than $25,000. Those projections showed that people earning $50,000 to $75,000 would see an average $282 reduction in taxes and those who earn more than $250,000 would be taxed an average of $5,239 less.
And his continuation of the temporary sales tax increase and elimination of deductions and credits that benefit particular groups of people made the plan politically unsavory for some lawmakers.
Brownback said Friday that he’s open to suggestions, but that the state needs to get tax rates down and grow small business.
“If they want to do things differently, great,” he said. “Let’s begin it and put it forward in the legislative process.”
Brownback defended the elimination of the earned income tax credit, saying that all that money would go toward doubling the standard deduction for heads of household; increasing aid for temporary assistance to the people most in need; and helping draw more federal dollars for Medicaid, the health-care program for the poor.
Senator’s proposal: No sales tax on food
Sen. Dick Kelsey, R-Goddard, said the House Republican plan appears to be just an outline and that the details will decide whether it succeeds. He said he doesn’t think the Senate could pass Brownback’s proposal for a variety of reasons.
“Almost everybody has a different issue that is their primary heartburn issue,” he said. “When you put them all cumulatively together, there’s no way that many of us can vote for it. The support is not there.”
Kelsey, meanwhile, has proposed a bill that would eliminate sales tax on food in 2013 and corporate income taxes by 2014 while drawing down individual income tax rates and the state sales tax. It would tax many services that haven’t been taxed before.
Democrats said support for Brownback’s plan has eroded quickly, and they promoted their education plan, which features a fund to help reduce the growth of property taxes, which they say is the most unpopular tax.
Senate Minority Leader Anthony Hensley, of Topeka, said the House Republican plan presents inequities by giving a guaranteed tax break to businesses while any reduction for working Kansans hinges on revenue growth.
House Minority Leader Paul Davis of Lawrence said some subchapter C corporations may refile as limited liability companies to avoid taxes, though he acknowledged that won’t make sense for some businesses because of federal regulations.
Davis also said some CPAs and attorneys have told him some businesses could find ways to game the system by cutting back on salaries and classifying them as business income at the end of the year.
Hensley put it less diplomatically.
“I think the potential here is a loophole in tax policy that you could drive a Mack truck through,” he said.