Kansas lawmakers got an early start Monday on a plan to potentially put owners of limited liability companies and other closely held businesses back on the income tax rolls.
Moments after the ceremonial swearing-in of new House members, the Taxation Committee introduced a bill to repeal the tax break originally proposed by Gov. Sam Brownback and approved by the Legislature in 2012.
That bill could come to a hearing as early as Wednesday. Rep. Steven Johnson, R-Assaria and chairman of the committee, cautioned that a final tax plan could be substantially different and touch sales and property tax policy. He also said spending cuts could be part of the equation to balance the budget.
The 2012 tax law created a zero tax bracket for income from LLCs, subchapter S corporations and other businesses where profits pass through to owners.
The exemption is estimated to have affected more than 300,000 business owners and cut state revenue by about $260 million a year.
The state faces estimated deficits of $350 million this year and $560 million to $580 million in 2018, Johnson said.
The LLC exemption was a major issue in the campaigns this fall, when more than two dozen Democrats and Republicans with more moderate tax views unseated anti-tax incumbents.
This year, only seven of the 23 members of the tax committee have served on it before, Johnson said.
As members introduced themselves, several said they see repealing the LLC exemption as the committee’s first and most important item of business.
“My experience and my observation has been that we’ve put Band-Aids and done quick fixes, and that just makes the situation worse,” said Rep. John Alcala, D-Topeka.
Rep. Erin Davis, R-Olathe, said she and others have “tried very hard and worked very hard to repeal that (LLC) loophole.”
“And now we’re sitting two years later and we are still facing the same thing, so I’m absolutely supportive of repealing that as soon as possible.”
One major question if the exemption is repealed is how soon the state would start getting the income.
Two choices on the table are to start the tax collection in January 2018 or make it retroactive to January 2017. At best, the earliest the state would see increased collections would be spring 2018, Johnson said.
Committee members said if they do make collection retroactive, they want to finish a bill as soon as possible, ideally by the end of this month, so business owners could plan for a higher tax burden.
Several members expressed doubts about that.
“When we start talking about retroactivity, I get a little nervous,” said Rep. Dan Hawkins, R-Wichita.
He said the state should also take a look at paring back sales tax exemptions, which he said total $6 billion, as part of the budget solution.
Rep. Tom Sawyer, D-Wichita, who has served off and on in the Legislature since 1986, said many tax bills over the years – including some that didn’t pass until late in the session – have had retroactivity provisions.
However, he did say it was different to put an entire class of taxpayers back on the rolls, so sooner would be better.
“I think, you know, based on discussions from the past election, there are a lot of people out there expecting this to happen, so it’s not like it would be a total surprise to them,” he said.