The question as Kansas kicks off its annual legislative session this week isn’t whether lawmakers will raise taxes but rather which taxes – or more precisely, whose?
The state faces a projected budget shortfall of more than $900 million for the next 18 months. There’s broad consensus among lawmakers that tax increases will play some role in the solution.
“We cannot do it strictly with (budget) cuts,” said House Majority Leader Don Hineman, R-Dighton.
Lawmakers also could face an order to spend millions more on schools, depending on how the Kansas Supreme Court rules on a lawsuit brought by Wichita and other districts.
“We know we need a tax increase just to address that structural imbalance,” Hineman said. “And then the other issue facing us is that Supreme Court decision … so really there’s a need to put that new tax policy in place early so we have a better scenario for crafting a realistic budget.”
A number of ideas are already floating around the Capitol. Gov. Sam Brownback’s income tax exemption for certain business owners has been mentioned repeatedly for repeal.
Brownback remains committed to the policy, telling reporters last week that the idea of targeted small business tax cuts is growing nationally and is working in Kansas.
The governor’s veto threat stalled efforts to roll back the policy two years ago. But that might not matter this year, when a wave of new lawmakers takes office after campaigning against the exemption and other Brownback tax policies.
Senate Majority Leader Jim Denning, R-Overland Park, predicted that a bill eliminating the exemption could pass with a veto-proof majority.
Repealing the exemption – estimated to bring in more than $200 million – won’t close the projected budget gap, though. The more contentious debate is likely to be about other possible tax increases.
Proposals range from increasing taxes on gasoline, cigarettes and alcohol to closing sales tax exemptions, said House Minority Leader Jim Ward, D-Wichita.
Democrats say the state needs to restore a third income tax bracket, which would reverse another of Brownback’s key tax policies.
Before 2012, Kansas had three income tax brackets: married couples earning less than $30,000 paid a rate of 3.5 percent, while couples making between $30,000 and $60,000 paid a rate of 6.25 percent. Couples earning $60,000 or more paid a rate of 6.45 percent.
At Brownback’s urging, the state combined the top and middle brackets and cut rates across the board.
“That’s the biggest culprit right there in terms of shortfalls in the budget,” said Senate Minority Leader Anthony Hensley, D-Topeka. “The wealthier Kansans … are paying far less taxes than they did before.”
Couples earning less than $30,000 now pay a rate of 2.7 percent, while couples earning more pay a rate of 4.6 percent.
Denning said some lawmakers are considering a 5 percent flat tax rate. That would represent a .4 percentage point tax increase for taxpayers in the upper bracket and a 2.3 percentage point increase for the lower bracket.
Ward said working class Kansas have already been gouged by other tax changes to help pay for Brownback’s income tax cuts and shouldn’t be targeted again.
“I think the working class and middle class have paid their fair share. They’ve had two sales tax increases, they pay more for their car tags, their home mortgage deduction has been cut in half, they’ve lost their child care credit,” Ward said. “These folks have already paid their fair share. And I think we should take that into consideration.”
Brownback will release his budget this week, and he could propose alternatives to a tax increase, including selling off future proceeds from the state’s legal settlement with tobacco companies, a pool of money now used to fund children’s programs, such as Early Head Start and Tiny K.
Legislative leaders, including Senate President Susan Wagle, R-Wichita, have balked at that idea in the past and are unlikely to embrace it now.
Spending cuts will also likely be considered.
Rep. Troy Waymaster, R-Bunker Hill, the newly appointed House budget chairman, floated the idea of requiring state agencies to use vehicles until they reach 150,000 miles – as opposed to 100,000 – as an example of one way to find savings.
But he said he realizes the state is unlikely to fix its budget problems without a tax increase. He said the election made it clear that Kansans want to see the state on more secure financial footing.
“Overwhelmingly, the audiences that we spoke to want to have some type of security as far as the financial stability of the state and we haven’t been experiencing that the last few years,” Waymaster said. “I think there’s been this expectation of seeing if the tax plan will work. I think it’s come to the point where we need to revisit the tax plan.”
One variable that lawmakers will face as they look to balance the budget is how the court rules on school funding.
“We don’t really know exactly what the dollar figure’s going to be,” Waymaster said.
Lawmakers will face a tight deadline to act on school finance regardless of the court ruling. The block grants used to fund schools for the past two years will expire at the end of June.
Lawmakers will have to either pass a new funding formula before the end of the session or extend the block grants for a year, which could prompt political backlash from the education community.
Incoming House Speaker Ron Ryckman, R-Olathe, has designated a special K-12 Budget Committee to work on crafting a new formula in the House. The meetings will be live-streamed throughout the session.
“Our intentions are to have debate and stakeholders come in and educate our committee with the goal of passing a new school finance formula,” Ryckman said. “There’s obviously no guarantees in the business, but if we don’t try, the guarantee is that we will fail.”
Understanding that the budget, taxes and education are all inextricably related will encourage the Legislature’s competing factions to seek compromise solutions “instead of just being an absolute no,” Ryckman said.
Ward said it is possible to right the state’s finances and pass a new school finance formula during the course of one session, but it will require lawmakers to choose long-term solutions over political expediency.
“People have to come here refusing to accept the shortcuts that have gotten us into this problem,” he said.