New Senate committee plan would modify business tax, raise other taxes

TOPEKA – A state Senate committee forged ahead Tuesday with a broad plan to raise taxes to close a budget deficit, including replacing a 2-year-old business tax break with one specifically aimed at rewarding job creation and retention.

The proposal also would change a wide menu of taxes, including on sales, property, tobacco, fuel and liquor.

Meanwhile, House members tussled over whether to include the tax on business owners as part of its package or to primarily rely on sales taxes to fill a budget hole currently estimated at $406 million.

Gov. Sam Brownback favors consumption taxes, like a sales tax, and opposes changing the 2012 business exemption. That law eliminated the income tax for owners of limited liability companies, sole proprietorships and corporations organized under subchapter S of the federal tax code.

“The consumption side is paid partially through people traveling through our state and I think it’s a better place to put the cost of government,” he said. However, only 5 percent of the sales tax base comes from out-of-state visitors spending money in Kansas, according to estimates from the Kansas Department of Revenue.

The Kansas Club for Growth is airing ads on Fox News warning that changing the exemption would harm small businesses. The organization employs lobbyists David Kensinger and Mark Dugan, former Brownback aides. Its president is David Murfin, an economic adviser to Brownback.

The ad features two Topeka businesses: Jackson’s Greenhouse, owned by former lawmaker Dave Jackson, which hosted campaign events last year for Brownback, and Leading Edge Academy, a private tutoring and home-schooling center that files as a limited liability corporation.

In the ad, academy owner Jennifer Turner encourages lawmakers to visit her business and see the difference it makes in the lives of families it serves.

“We can cut schools but we can’t cut the small business that provides private education services,” Senate Minority Leader Anthony Hensley, D-Topeka, said upon seeing the ad. He sarcastically called the business exemption Brownback’s “pride and joy.”

Asked if his office was actively pushing against changing the business exemption, Brownback would say only that he was pushing for the ideas he has offered, such as a tobacco tax increase.

Multifaceted Senate plan

The Senate plan would reinstate income tax for business owners who are exempted now and add a tax credit equal to 1 percent of the company payroll.

It was authored by Les Donovan, R-Wichita, chair of the Senate Assessment and Taxation Committee.

Using his own car dealership business as an example, Donovan said he has a $3.2 million payroll, which would net him a $32,000 tax credit.

“Currently I get a lot more of a (tax) cut than that,” he said.

That change would generate $81.9 million, according to legislative research estimates.

Sen. Jeff Melcher, R-Leawood, said he wasn’t comfortable changing the zero tax rate for business owners who have it now, because many have shaped their business plans around it.

By the dollars, the biggest increase would be in the state sales tax.

At present, the state sales tax is 6.15 percent. Donovan’s plan would raise the sales tax on general purchases to 6.5 percent, while lowering the tax on food to 6 percent.

That would generate $134 million – $164 million in general sales taxes, minus about $30 million to pay for the cut in the grocery tax.

The tax plan also would:

▪ Add 5 cents per dollar to the gasoline tax, generating nearly $82 million.

▪ Speed up the ongoing process of eliminating income-tax deductions, $50.3 million.

▪ Raise the cigarette tax 50 cents and raise taxes on other tobacco products from 10 to 15 percent, $43.2 million.

▪ Repeal the homestead exemption on the first $20,000 valuation of taxpayers’ primary homes and increase the maximum refund for low-income homeowners, a net increase of about $40.6 million.

▪ Increase liquor enforcement and gallonage taxes on alcoholic beverages, $29.7 million.

Together, the tax increases would raise nearly $470 million, more than enough to deal with the current shortfall and add $63 million to the ending balance, Donovan said.

Coupled with a Brownback plan to offer a tax amnesty program, expected to bring in $30 million in back tax payments, the plan would allow the state to end 2016 with $93 million in the bank, analysts said.

“We’re not going to go broke again. That’s our hope,” Donovan said, adding that his goal was to spread the tax bite as widely as possible.

On its third try, the Senate tax committee voted 6-5 for a parliamentary maneuver to insert the Donovan plan into a dormant House Bill 2109.

That tees up a pivotal committee vote to send the bill to the Senate floor. If it passes there, it could go straight to a vote on the House floor, bypassing the regular committee process.

House panel: sales tax or a mix?

The House Tax Committee sparred Tuesday over whether to rely primarily on sales tax or use a combination of taxes to plug the budget hole.

The committee is weighing – but has yet to act upon – a package that includes a repeal of the income exemption for business owners.

Rep. Steve Brunk, R-Wichita, offered an alternative that would have raised the sales tax from 6.15 percent to 7.15 percent. That would raise $426 million in revenue and give Kansas the second highest sales tax in the nation.

Combined with local taxes, Sedgwick County residents would pay 8.15 percent in total sales tax under the plan and more than 10 percent in certain tax districts in Wichita.

“If you consume more, you contribute more,” Brunk said, contending the plan was fairer than raising income taxes.

Brunk’s comment contrasted sharply with an editorial he wrote in 2010, blasting a 1-cent sales tax the Legislature passed under Democratic Gov. Mark Parkinson. “This recent tax increase to sustain an already bloated government was neither necessary nor responsible,” he wrote.

Brunk defended his change in position.

“The difference then was there was no real revenue shortfall. We were raising taxes so we could spend more money,” he said.

Cuts to state spending – paired with tax increases – were made under Parkinson as a response to the 2007-09 recession. Some groups on the right have accused Brownback and lawmakers of not doing enough to curb spending. But Brunk contended that under Brownback the state “found hundreds of millions in savings that the previous administration wasn’t even willing to look for.”

Rep. Brandon Whipple, D-Wichita, said a steep sales tax hike would be an incentive for people to shop online rather than in local stores.

The committee rejected Brunk’s proposal and a similar one offered by Rep. Marc Rhoades, R-Newton, that would have raised the sales tax to 7.15 percent but dropped the tax on food purchases to 5.9 percent.

The committee will meet to consider other options, including a proposal by Reps. Dennis Hedke, R-Wichita, and Kasha Kelley, R-Arkansas City. It would preserve the business income exemption and reduce income taxes on the lowest bracket to 2.55 percent, but it would reduce itemized deductions by about $100 million. It would raise the sales tax to 6.8 percent on everything except food and end a sales tax exemption for state agencies.

This story was originally published May 12, 2015 at 10:32 AM with the headline "New Senate committee plan would modify business tax, raise other taxes."