House and Senate negotiators struck a deal on an income and property tax reduction bill Thursday that advocates say could create jobs and opponents say could shift the tax burden toward lower- and middle-class Kansans.
The complex bill calls for a phase-out of nonwage income taxes for more than 190,000 businesses, lower income tax rates for individuals and $45 million a year for local governments for property tax relief.
It forces low-income Kansans to choose between using the earned income tax credit or the food sales tax rebate.
The exact cost of the proposal isn’t yet known. But some projections based on an earlier version of the plan show that it could cost more than $600 million a year when all the cuts are in full effect. That doesn’t take into account any new growth that could be generated by the tax cuts.
Wichita Republican Sen. Les Donovan, who was a chief negotiator on the deal, said the cuts will be paid for by the growing ending balances projected by the Department of Revenue.
“If it turns out to be too expensive, we will take another look at it,” he said. “We may have to make some adjustments.”
Wrapping property tax relief into the bill and retaining the earned income tax credit should make it more palatable to moderate Republicans in the Senate, Donovan said. But he stopped short of predicting approval.
Wichita Democrat Rep. Nile Dillmore, who is also on the conference committee, said projected costs of the cuts vastly underestimate reality. The projections don’t account for all the businesses that would likely reorganize to take advantage of the elimination of nonwage income taxes on limited liability corporations, subchapter S corporations and sole proprietorships.
“It’s always been couched as aimed at small businesses,” he said. “But some of the largest corporations in America are LLCs.”
Next week, the six tax bill negotiators will be asked to sign a report that details the wide-ranging proposal. Dillmore said he and his Senate counterpart, Sen. Tom Holland, could refuse to sign it and force the House and Senate to vote to accept the altered bill even though not all negotiators agreed.
That, he said, could be a test vote for the bill’s prospects in the Senate, where lawmakers have been skeptical of cutting income taxes because they think most Kansans are more concerned about property tax relief.
Brownback cautious on changes
The emerging tax plan strays far from what Gov. Sam Brownback proposed in his state of the state address in January. Brownback had proposed capping the growth of state spending at 2 percent a year and channeling anything beyond that toward further reducing rates as long as the state had a healthy ending balance.
That cap has been removed from the plan.
Brownback had called for eliminating dozens of popular tax credits and deductions to help offset the cost of cutting rates. Many of the most popular – such as the home mortgage interest deduction, historic tax credits and earned income tax credit – have been retained.
Brownback’s proposal was immediately met with skepticism, and his proposal languished in a Senate committee for months before finally emerging after committee members retained popular credits and eliminated the cap on government spending, which many saw as artificially limiting government without regard to the state’s potential needs.
House Republicans immediately drafted an alternative, which also retained popular credits and allowed the six-tenths of a cent sales tax to expire on schedule. That plan was approved, but only after an amendment that would have eliminated the sales tax on groceries.
House and Senate negotiators quickly agreed that the state can’t afford to forego the sales tax on groceries while also cutting taxes for businesses and individuals.
Brownback told the Associated Press he likes the direction the tax plan is taking, despite the changes. But he said the plan must not cause budget problems.
The plan still faces resistance from moderate Republicans and Democrats who say that it costs too much and could limit the state’s ability to properly fund schools and other important services.
“We’re not cutting taxes, we’re shifting the burden,” said Holland, who ran against Brownback in 2010. “We’re shifting the burden onto the working poor and the middle class. I think at the end of the day that is not a recipe for economic success.”
What’s in the agreement?
• In 2013-2014, limited liability companies, subchapter S corporations and sole proprietorships don’t have to pay nonwage income tax on their first $100,000. It moves to the first $250,000 the following two years before the tax is eliminated in 2017.
• Kansas’ three individual income tax brackets are collapsed to two. Taxpayers earning less than $30,000 a year pay 3 percent. Those earning more pay 4.9 percent.
• As in current law, six-tenths of the one-cent sales tax lawmakers approved in 2010 is eliminated on July 1, 2013. The remainder continues to fund highway projects.
• Qualifying tax filers must choose either the earned income tax credit or the food sales tax rebate.
• $45 million a year goes to local governments for property tax relief, reviving a program that has been dormant for years.
• 24 counties are added to the existing 50 counties in the rural opportunity zones program, a Brownback initiative that encourages people who have lived out of state for at least five years to move to Kansas by offering an exemption from income taxes for five years and repaying up to $15,000 in student loans.
• Oil producers are exempt from severance taxes on only the first 100 barrels of oil per well in new oil fields.