TOPEKA – A bill that would place business owners back on state income tax rolls as part of a fix for the state’s budget gap won approval from the House Taxation Committee on Monday despite strong objections from conservative lawmakers.
HB 2430 repeals one of Gov. Sam Brownback’s signature policies, a tax exemption enacted in 2013 that allows certain business owners to pay no income tax. The bill passed out of committee by a vote of 13-8, drawing support from Democrats and moderate Republicans, who criticized the governor’s tax plan.
The bill, as amended in committee, would tax passive income, such as rents and royalties, at a rate of 4.6 percent and all other business income at a rate of 2.7 percent, the lowest income tax rate. This would bring $133.6 million for fiscal 2016, which begins July 1. The committee shed a provision that would have required businesses to provide proof that they have employees in order to qualify for an exemption.
Lawmakers face a budget hole of more than $400 million for fiscal 2016, and as the Legislature enters the third week of its wrap-up session, there’s still no consensus among Republicans, who hold supermajorities in both the House and Senate, on how to the fill the hole.
The governor has repeatedly said he prefers taxing consumption – such as sales taxes and taxes on alcohol and tobacco – rather than income but has refrained from putting forward a comprehensive plan to fill the hole.
But many Republican lawmakers in recent weeks have grown increasingly interested in revisiting the portion of 2012 tax law that eliminated income taxes for the owners of certain businesses, such as limited liability corporations and S corporations. Rep. Mark Hutton, R-Wichita, called the policy “fundamentally unfair,” arguing it gives business owners a tax break “at the expense of other people” who are still paying income tax.
“If we are going to look our constituents in their eyes … and say that we’re representing them the best we can, I think we need to be as fair as we can,” he said.
Hutton’s plea for fairness drew support from Democrats, who have criticized the tax policy since before its enactment.
Rep. Tom Sawyer, D-Wichita, said it was an easy choice for Democrats to support the bill.
“Before we start looking at trying to raise taxes on working families … these 330,000 businesses need to have some skin in the game, they need to be paying some income tax,” Sawyer said. “In the end, we want this to be part of the solution.”
Rep. Carolyn Bridges, D-Wichita, noted that she’s the owner of some rental properties – which aren’t taxed under current law – and said she thinks she ought to be paying her fair share.
Conservatives, however, voiced outrage about the rollback of the exemption.
Rep. Marc Rhoades, R-Newton, said repealing the exemption after only two years makes the state look foolish and schizophrenic. “It signals to rest of the country ‘Time out. We didn’t really mean that,’ ” he said.
Rhoades accused Hutton and other Republicans of adopting Democratic rhetoric. “If there wasn’t a revenue problem, we wouldn’t be having these conversations. They wouldn’t be calling it ‘unfair.’ But now we have to justify coming back and doing something.”
Rhoades, who previously served as appropriations chairman, argued that the budget the governor proposed in January was illegal because it was not a balanced budget without tax increases. He said the Legislature should have sent it back to him then and demanded that he make cuts, but now that they find themselves in May with a hole, lawmakers should rely on consumption taxes rather than tax business owners.
Rep. Kasha Kelley, R-Arkansas City, warned that it would be one of the largest tax increases on small businesses in the state’s history. Kelley said she did some research after the meeting and that it was the biggest tax increase on businesses since the 1930s.
“We should be holding the course. We should be looking at what our core issue is, which is spending. Spending is our core issue. We would still not be here if we would take a hard look at the budget,” Kelley said.
The Kansas Chamber of Commerce has opposed the repeal of the income tax exemption. The chamber has backed efforts to rely on consumption taxes, such as the sales tax, instead, while still pushing for spending cuts as a first option.
The repeal of the business income tax exemption is one feature of an overall tax package being offered by Rep. Gene Suellentrop, R-Wichita. The committee will review the tax package Tuesday.
Other policies include raising the sales tax to 6.5 percent from the current level of 6.15 percent for most purchases. However, Suellentrop’s proposal would reduce the sales tax rate on food bought at the grocery store to 5.9 percent.
Most states exempt food entirely from sales tax. Kansas is one of only a handful of states that taxes it at the same rate as other purchases. The overall impact of the sales tax changes would be an extra $128 million in state coffers.
Suellentrop’s plan would increase the tax on a pack of cigarettes by 75 cents – which is half the increase the governor proposed in January – bringing the overall state tax to $1.54 a pack. He would also temporarily raise the state tax on gasoline from 24 cents to 29 cents for two years.
Suellentrop also would go with the governor’s recommendation to reduce the value of itemized deductions, such as the homeowner’s exemption, on income tax returns by 50 percent for the current tax year.
All told, Suellentrop’s plan would leave the state with a positive ending balance of $101 million for next year.
For his part, Brownback would not support, or offer, a specific plan for closing the state’s budget hole when pressed Monday.
Brownback said he has been meeting with lawmakers about different options. But he would not make details of those talks public.
“We’ve been floating different ideas,” Brownback said. “I don’t think that it’s useful in the process right now to be putting out grand plans. This is really the time that the Legislature’s really got to come around to with what they decide.
“We have lots of different ideas,” Brownback said. Asked whether he would share a specific example, the governor replied, “Nope.”
In recent weeks, a divide has formed between Republican lawmakers as to whether to fill the hole entirely through a sales tax increase or to use a combination of taxes, including ending the business income tax exemption.
A proposal to raise the sales tax from 6.15 percent to 7.15 percent – or an extra cent for every dollar of an item’s price – would bring in $426 million, enough to close the entirety of next year’s hole. Some conservatives have been pushing this option as a way to avoid making changes to the state’s income tax structure.
Brownback would not say whether he supported raising the sales tax to a specific level.
“My years in this building have said the best thing for me is to try and encourage people to come together around some agreement, not to generally be out there saying you ought to do this or not do that,” Brownback said.