Groceries would be taxed at a lower rate, but the elevated sales tax rate approved in the wake of the recession would continue indefinitely under a plan approved by the Senate in the waning hours of the legislative session Thursday.
The plan, which sought to break a political logjam after weeks of disagreements between the Republican-dominate House and Senate over the sales tax rate, won approval on a 25-14 vote.
It would lower income tax rates. It would bring in hundreds of millions of dollars to stabilize the state budget in the wake of big income tax cuts last year. It would do that by keeping the sales tax rate and by phasing out deductions that return tax money to Kansans for a variety of activities, such as buying a home.
Lowering income taxes will create more jobs than lowering property or sales tax, said Senate President Susan Wagle, R-Wichita.
“We’re in a stagnant economy,” she said. “This is the best policy we can enact now to counter everything at the federal level.”
In a prepared statement, Gov. Sam Brownback said the Senate’s plan will increase private sector jobs and personal income for Kansas families and businesses, and he said it lowers the tax burden on all Kansans.
But it remained unclear whether the new proposal could pass the House, which sought to let .06 percent of the state sales tax expire as scheduled in July.
The House could vote on the plan as early as Friday morning, sending it to Brownback, or reset the entire debate and push the Legislature deeper into overtime. It surpassed 90 days on Thursday.
“I think it’s a very viable plan for the House,” said Wichita Republican Rep. Gene Suellentrop.
But House Republican leaders have long resisted any sales tax rate beyond 6 percent.
The Senate’s plan would continue indefinitely the increased sales tax rate of 6.3 percent that lawmakers approved in 2010 to protect state services during the recession. The proposal would lower the rate on groceries to 4.95 percent starting in 2014.
Several lawmakers opposed the plan, in part because they promised to let the sales tax increase expire.
“We made a promise, we should keep that promise,” said Wichita Democratic Sen. Oletha Faust-Goudeau.
Senators voted separately and unanimously to approve the lower rate on groceries.
The overall plan would phase out all tax deductions, except for those on charitable contributions, by 2018. It would lower income tax rates from the current 3 percent and 4.9 percent to 2.8 percent and 3.5 percent by 2018.
Senate Majority Leader Terry Bruce, R-Hutchinson, said the new rates would give Kansas some of the lowest income tax rates in the region.
Democrats attempt to protect the mortgage interest and real estate property tax deductions, but those attempts were shot down.
The Senate’s plan also sets the standard deduction at $5,000 for heads of household and $6,500 for married couples filing jointly. That would reverse a change approved last year to increase the deduction to $9,000 for both.
Projections show the proposal leaves the state with money in its savings account through 2018, although it erodes that amount from $502 million to about $118 million – or 1.8 percent of how much the state spends.
The proposal brings in about $878 million in additional revenue, which is intended to stabilize the budget after massive tax cuts approved last year that didn’t include any balancing factors.
“Make no mistake about it, this is a tax increase,” said Baldwin City Democratic Sen. Tom Holland.
He said it shifts the burden to low- and middle-class Kansans and questioned why the state wouldn’t just reinstate the food sales tax rebate that lawmakers eliminated as part of the big tax cuts last year.
Sen. Caryn Tyson, R-Parker, said the rebate makes families wait to get their sales tax back until they file their taxes instead of just paying less day-to-day.
Johnson County Sen. Jeff Melcher said a flat 6.125 percent sales tax would generate the same amount of revenue, and he suggested just lowering the rate on food is “social engineering” in the tax code.
He said tax rates are meant to change behavior and lowering the sales tax on food encourages the purchase of food and eating more, which could exacerbate the state’s obesity problem. He also said the state has programs for the poor to get food.
“It seems to me it provides a complexity in the tax code that the retailers will have to deal with,” he said, noting potential difficulty coding products as food or not food.
Andover Republican Sen. Ty Masterson said the state has all kinds of “social engineering” in its tax code, including tax deductions for charitable contributions and taxes on alcohol and tobacco. He said lowering taxes on food gives people more for their money.
“My goal is to lower the tax burden overall on my constituents,” he said. “This does that.”
The Senate also considered the 6 percent sales tax rate woven into a larger compromise the House proposed. It was easily shot down.
“I just think this is poking the House in the eye,” said Senate Minority Leader Anthony Hensley, D-Topeka.
About a month ago, the House unanimously rejected a previous Senate plan that kept the sales tax at 6.3 percent.
Last year, Brownback made income tax cuts the cornerstone of his agenda. But the Senate, controlled by a coalition of moderate Republicans and Democrats, resisted the idea and stripped Brownback’s proposal revenue balancers, like continuing the 6.3 percent sales tax and eliminating most tax deductions.
Brownback signed the bill anyway, triggering a steep dropoff in state revenues that fund core services.
The new tax code dropped income tax rates from the previous 6.45 percent and 6.25 percent top brackets to 4.9 percent and the lower bracket from 3.5 percent to 3 percent.
This year, Brownback sought to essentially revive many of the ideas in last year’s proposal while promising additional income tax rate reduction after conservative Republicans ousted moderates during primary elections.
As part of their debate, Senators voted 19-18 to reinstate the disabled access credit that refunds taxes paid as part of projects to make homes and businesses more accessible to people who have disabilities.
The National Multiple Sclerosis Society sought the reinstatement, and many lawmakers said they didn’t realize they had eliminated the credit as part of last year’s complex tax-cutting bill.
But Wagle and Bruce said that would open the door to more changes to the bill and said they’re trying to get rid of tax credits, including the $34,000 worth of rebates to help make buildings more accessible.
Melcher again labeled it “social engineering” that complicates the tax code.
The credit is still available to corporations, just not individuals.
“It’s not fair to allow this credit for corporations, but not individuals,” said Topeka Republican Sen. Vicki Schmidt.
She noted the credit costs the state about as much per year as it costs taxpayers for the Legislature to meet for one day, including Friday, which is the first day of overtime for lawmakers.