A bill that would push income tax rates down while eroding the value of most tax deductions and that would extend a sales tax increase that was set to expire this summer won approval in the Kansas Senate on Thursday.
With 25-14 support, the bill will now likely wait on the sidelines until the House votes on its own tax-cut proposal.
The tax cuts are expected to force corresponding cuts to the state’s evolving budget for next year. That could include cuts to state universities and state courts, although much is likely to change in the coming weeks.
Driving down income tax rates is a top priority for Gov. Sam Brownback and most of the Senate Republicans he and other conservatives helped during last summer’s grueling Republican primary elections.
But it has forced a debate about extending a sales tax increase that was approved in the face of recession-fueled budget problems in 2010. That left many Republicans with a choice between reversing their stance on the sales tax in the name of cutting income taxes or opposing income tax cuts to let the sales tax decline in July as scheduled.
Sixteen Senate Republicans who opposed increasing the sales tax in 2010 voted Thursday to extend it indefinitely in order to drive down income tax rates.
Some of them noted impending budget problems caused by income tax cuts signed into law last year after moderate Republicans resisted deep tax cuts because of budget concerns and conservatives pushed through a bill that many thought would never become law.
Sen. Les Donovan, R-Wichita, the longest-serving Republican in the Senate, said he has voted against tax increases and for cuts for years. But he said the state has to continue the sales tax at its current level to make the rest of the budget cuts work.
Those who endorsed the plan including the sales tax extension but opposed the sales tax increase in 2010 include Sens. Steve Abrams, Pat Apple, Elaine Bowers, Terry Bruce, Les Donovan, Mitch Holmes, Dan Kerschen, Forrest Knox, Julia Lynn, Ty Masterson, Rob Olson, Mike Petersen, Mary Pilcher-Cook, Larry Powell and Susan Wagle. Sen. Dennis Pyle passed on the vote Thursday.
Republican Sens. Carolyn McGinn of Sedgwick and Vicki Schmidt of Topeka voted no, saying they strongly oppose breaking their promise to let the sale tax decrease from 6.3 percent to 5.7 percent this summer.
Sen. Michael O’Donnell, R-Wichita, said he opposed the plan because he promised to let the sales tax expire during his successful campaign against Republican Sen. Jean Schodorf last summer.
“People call me plenty of things, but they can’t call me a liar,” he said.
Sen. Tom Holland, D-Baldwin City, said the bill not only breaks lawmakers’ promise to let the sales tax decrease, it also takes more money from taxpayers than it gives them in its first four years of implementation.
“The Legislature’s continuation of tax policy is designed to benefit the big businesses of the wealthy at the expense of hard-working Kansas taxpayers,” he said.
Holland and other Democrats say that relying on the sales tax while eliminating income taxes for 191,000 businesses, lowering rates for individuals, eroding deductions and cutting the state budget creates a regressive tax system that hurts the state’s neediest.
Lawmakers will likely have to cut a minimum of $50 million in state spending from next year’s budget to accommodate income tax cuts, Senate Majority Leader Terry Bruce, R-Hutchinson, said.
The cuts could, however, go much higher – to perhaps $70 million, he said.
Such spending cuts could grow in following years to deal with lower revenue resulting from the income tax cuts. But if the income tax cuts spur economic growth, as Republicans project, the spending cuts may not be as extreme, Bruce said.
The proposal faces strong opposition in the House, where Republican leaders say they don’t want to extend the temporary sales tax increase.
Senators and House representatives may compromise on the sales tax issue in some way, but it’s not clear how just yet, Bruce said.
“Nobody is going to walk away with everything they want,” he said. “But, hopefully, it’s what the state needs right now.”
Under the plan advanced by the Senate, the sales tax would be frozen at 6.3 percent, and income tax rates for the state’s bottom bracket would be trimmed from 3 percent to 2.5 percent in 2014 and dropped to 1.9 percent in 2016. The top rate would drop from 4.9 percent to 3.5 percent in 2017.
Rates would then be cut more whenever the state has more than 4 percent annual revenue growth.
Brownback had proposed eliminating the real estate property tax and mortgage interest deductions to bring in more state revenue to offset reduced income taxes.
But senators rejected those ideas.