Kansas lawmakers weighed repealing Gov. Sam Brownback’s signature tax policy at a packed hearing Thursday.
The state eliminated income taxes for owners of limited liability companies and other pass-through businesses in 2012 in an effort to spur job growth.
The exemption has faced increasing criticism as the state faces budget deficits, and lawmakers in both parties have called for its repeal.
HB 2023 would put those business owners back on the tax rolls. It would be applied retroactively for 2017.
Repeal is estimated to generate between $200 million and $250 million a year.
Since 2013, this state has invested almost a billion dollars in the policy, so the billion-dollar question is: Is it working?
Former Rep. Mark Hutton, a Wichita Republican
“Since 2013, this state has invested almost a billion dollars in the policy, so the billion-dollar question is: Is it working?” former Rep. Mark Hutton told the committee.
Hutton, a Wichita Republican who owns a construction business, cited data from the Bureau of Labor Statistics, which shows job growth “has been at virtually the same rate since 2010,” with no perceivable change since the tax plan went into effect in 2013.
Hutton also pointed out that the state has reduced tax deductions for wage earners to generate revenue since creating the business exemption.
“When we raise taxes on one segment (of the population) to benefit another, we are picking winners and losers,” Hutton said.
Another business owner said the exemption had allowed him to hire more people.
Mike Bosworth, president of Sabetha’s NorthWind Technical Services, told the committee that he and his wife have steered their tax savings back into their business, which has expanded from nine to 32 employees since 2011, and have increased their giving to charities.
If the exemption is repealed, Bosworth said, his family would have to pay an additional $50,000 in taxes.
“Our budget will have to be rebalanced,” Bosworth said. “The pain of this law will be passed on to our employees and our community.”
Rep. Tom Sawyer, D-Wichita, pointed out that for Bosworth to save $50,000 in taxes from the exemption, he would have an annual income of more than $1 million. Sawyer questioned how Bosworth would not be able to find the money to expand his business even with an increased tax bill.
Rep. Kristey Williams, R-Augusta, asked Bosworth why his business would not have been able to grow if he still had to pay state income taxes.
We chose in part to grow because the tax law changed. … Those jobs came. Everybody benefited.
Mike Bosworth, president of Sabetha’s NorthWind Technical Services
“It changes the balance of the decision-making,” Bosworth said. “We chose in part to grow because the tax law changed. … Those jobs came. Everybody benefited.”
Scott Drenkard, an analyst with the Washington, D.C.-based Tax Foundation, told the committee there is a correlation between lower taxes and economic growth. But he said Kansas tax structure is flawed because the state carved out one specific type of income and then raised other taxes.
“The pass-through exemption is the strangest part of Kansas’ tax code,” Drenkard said.
He called the policy “unique and uniquely damaging,” saying it acts as an incentive for tax avoidance rather than actual growth.
George Lay, president of Wichita-based George Lay Signs, said his business makes investment decisions based on federal taxes but that state policy has little impact.
Lay also said savings on his personal taxes do not “directly impact the balance in the company’s bank accounts.”
Brownback’s administration has opposed efforts to repeal the policy. Acting Revenue Secretary Sam Williams contended the tax policy was causing people to move from Missouri and “ensures job creators have the best environment for growth.”
Williams said the state’s budget problems stemmed partly from its revenue forecasting system, something he has pledged to improve.
“In my home, I don’t base what I do based on what I think I’m going to get. I base it on what I’m actually getting,” Williams said.
Rep. Tom Burroughs, D-Kansas City, replied, “If I was a homeowner, I wouldn’t quit my job.”