Extended sales tax, stealing highway improvement money or deeper cuts to state service.
Something’s got to give if lawmakers want to accommodate the income tax cuts that Gov. Sam Brownback and his conservative Republican allies pushed through last year and the additional reductions they seek this year.
It will likely come down to negotiations between the House and Senate, which have approved competing tax cut plans. Both aim to solve budget problems created by last year’s massive income tax cuts while also promising to continue a march to join nine other state with no income taxes.
Leaders on both sides said Wednesday that they’re optimistic they’ll find middle ground in the next couple of weeks before lawmakers take a month-long break.
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But no one seems willing to speculate on how that compromise will be reached.
The Republican-dominated Legislature does, however, seem to agree that driving down income tax rates is the best way to spur job creation, a concept some Republicans and virtually all Democrats dispute.
“Jobs for our Kansas families create self-respect and the dignity of work providing for our families,” said Rep. Richard Carlson, R-St. Marys. “More jobs – not more welfare and food stamps – is the answer our working families are looking for in Kansas.”
Agreement on a tax cut plan likely comes down to extending some or all of the temporary sales tax increase that is set to expire this summer, shifting money away from highways, eliminating tax credits or deductions – or some combination of that – paired with spending restraint.
The House got a powerful 82-37 preliminary vote for its plan, after rejecting an idea to use money intended for long-term transportation projects to pay for income tax cuts. A final vote comes Thursday.
Without the highway money, the House plan is likely to cause major budget headaches as early as next year. The plan also doesn’t guarantee quick income tax cuts on top of those approved last year. Instead, it promises to drive down rates any year state revenues grow by more than 2 percent.
The state usually plans on 4 percent growth, but that’s less likely if the state stops collecting a six-tenths of a cent sales tax scheduled to expire in July.
The Senate plan, meanwhile, cuts the state’s lower tax rate to 1.9 percent by 2016 and drops the top rate to 3.5 percent in 2017. It extends that six-tenths of a cent sales tax increase indefinitely. That helps keep the state’s budget relatively healthy, at least in the short term, but it’s politically problematic for lawmakers who promised to let it expire or view it as a tax hike.
Senators’ plan would take any growth in state revenues beyond 4 percent each year and channel it toward more income-tax cuts.
Vastly outnumbered Democrats bristle at both plans.
“Every proposal offered either raises sales tax on the middle class, de-funds the state’s largest jobs program, or requires massive cuts to core investments, like education,” House Minority Leader Paul Davis, D-Lawrence, said in a prepared statement. “No proposal offered solves the projected long-term deficit that Gov. Brownback’s tax plan created.”
The House plan took shape during a roughly 2.5-hour debate Wednesday.
Under Carlson’s original proposals, about $382 million that would have otherwise helped fuel a 10-year road improvement plan would have gone to the state’s general fund for the next two years.
That proved politically unpopular, and Kansas Department of Transportation Sec. Mike King warned it could delay or cancel projects statewide.
Carlson advocated cutting the proposed KDOT transfer in half. It passed on a 59-58 vote. He followed that up with a push to let all the money flow to KDOT, as planned. It passed on a voice vote.
Both the House and Senate plans would phase out the value of income tax deductions, such as the mortgage interest deduction, as income tax rates decline. The first step would trim the value of the deductions by 24 percent.
Democrats have blasted Republicans for pushing through massive income tax cuts last year, virtually forcing the state to find more revenue this year to avoid deep cuts.
That tax bill eliminated the tax on the profits of about 191,000 businesses and farms and lowered rates to 4.9 percent for the higher-income bracket and 3 percent for the lower-income bracket. It eliminated a host of tax credits and deductions, such as the food sales tax rebate that benefits poor working families.
House lawmakers tried revisit to last year’s cuts.
One attempt sought to reinstate the adoption credit. That failed.
Another push would have kept all deductions at full value, as opposed to phasing them out as tax rates decline. It failed on a 38-79 vote. And a push to tax rental and royalty for businesses that had taxes eliminated last year failed on a 37-70 vote.
“Somewhere there are winners, somewhere there are losers,” Rep. Nile Dillmore, D-Wichita, said of the plan to find new revenue to backfill the tax cuts. “The losers are the ones who have to pay half a billion over the next five years to pay for this tax plan.”