House Republicans pitched the details Friday of an alternative to Gov. Sam Brownback’s tax-cutting plan that keeps existing tax credits and appears better for low-income taxpayers.
But it may face fierce opposition because it limits the growth of state spending to 2 percent a year and uses any additional revenue to drive down tax rates. Spending caps are popular with many limited-government conservatives but raise questions for some moderate Republicans and Democrats who worry the caps could erode the quality of education and other government services.
The plan, which arrives during a week full of hearings on Brownback’s plan, would provide an average tax reduction of $11.64 a year for taxpayers who earn less than $25,000 a year, according to projections by the state Department of Revenue. That stands in stark contrast to Brownback’s plan, which drew immediate fire when estimates showed that it would increase taxes for that group of taxpayers by $159 on average.
House Speaker Mike O’Neal, R-Hutchinson, and House Taxation Committee Chairman Richard Carlson, R-St. Marys, said they have the same pro-growth goals as Brownback. They just have a different way to achieve them.
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Brownback, meanwhile, welcomes all tax reform suggestions that create jobs and increase Kansans’ income, said the governor’s spokeswoman, Sherriene Jones-Sontag.
Under the House Republican plan, income tax rates for those earning $30,000 a year or less would drop from 3.5 percent to 3.24 percent in 2014. Those earning $30,000 to $60,000 would see rates drop from 6.25 percent to 5.85 percent. And those earning more would pay 6.1 percent, down from the current 6.45 percent.
The plan would make nonwage profits tax exempt for limited liability companies, subchapter S corporations and sole proprietorships with less than $100,000 of income beginning in 2013. Businesses that draw less than $250,000 would become exempt from nonwage income taxes in 2016 and 2017. After that, all such companies would get the tax break on nonwage earnings.
The plan has a $41.7 million price tag in 2013, which is less than half of the estimated impact of Brownback’s plan. But it’s unclear what the fiscal effect would be in 2018, after the full business tax break goes into effect.
Carlson said the proposal:
• Keeps existing tax credits. The earned income tax credit, which gives about 228,000 low-income families a tax rebate, would remain untouched in 2013. Then it would be cut in half in 2014, setting the credit at 9 percent of the federal tax credit rate. It is currently set at 18 percent.
• Caps state spending at 2 percent, using any additional revenue to further dial down individual income tax rates, with an accelerated reduction for low-income tax filers.
• Allows .6 percent of the 1 percent sales tax increase to expire as planned. The remainder would go toward long-range transportation projects as planned.
• Adds 21 new Rural Opportunity Zones for people who move into counties with very low population.
• Doubles standard deductions for head of household tax filers to $9,000 in 2014.
Carlson said the state can handle the 2 percent spending cap by being more efficient, but he didn’t provide specifics.
“I think if we’re reasonable in our growth of expenses, we will be able to meet the needs of the growth of the services of Kansas,” he said.
House Minority Leader Paul Davis, D-Lawrence, said the concept sounds like “the Brownback plan light.”
“State income tax accounts for half of our state general fund,” he said later in a prepared statement. “If we eliminate half of our revenue — whether we do it all at once or over time — we either have to cut half of our state services or we have to find another way to pay for them. That means higher sales and property tax.”
Last year, the House passed a bill that would have lowered income tax rates as state revenues grew. But the proposal stalled in the Senate. Since then, many moderate Republican senators have faced attacks from the Kansas Chamber of Commerce and other limited-government entities.
O’Neal said it might be too early to say whether the House Republican proposal will fare any better than last year’s bill.
“They’re sitting on tax reform already, and I think the pressure is going to be to do something,” he said.
Senate President Steve Morris, R-Hugoton, said he doesn’t think a bill like last year’s will stand any better chance in the Senate this year.
He said climbing costs in Medicaid and the state employee retirement system represent well beyond a 2 percent increase.
“That makes for a permanent budget crisis every year,” he said. “It’s just too controlling.”