Kansas House proposal would raise sales tax to 6.85%, cut rate on food

TOPEKA — A proposal to raise sales taxes by $271 million will head to the floor of the Kansas House later this week.

SB 270, crafted by two south-central Kansas lawmakers, leaves an income tax exemption for business owners intact. It raises the state’s sales tax rate to 6.85 percent from 6.15 percent, but drops the rate on food purchases to 5.9 percent.

That means Sedgwick County residents would pay 7.85 percent in total sales tax on most purchases when the county tax of one-cent per dollar is added to the state’s tax. In some special tax districts in Wichita, the rate would be as high as 9.85 percent.

The change would give Kansas the eighth-highest state sales tax in the nation, according to 2015 data from the Tax Foundation.

The proposal from Reps. Kasha Kelley, R-Arkansas City, and Dennis Hedke, R-Wichita, comes as lawmakers search for a way to fix a projected deficit of more than $400 million in 2016.

It was approved by the House Tax Committee on Wednesday over other plans that would have paired a sales tax increase with an elimination of the income tax exemption for business owners. It probably will be up for a vote on the House floor Friday.

Kelley and Hedke strongly oppose changing the business exemption, which passed in 2012 and was championed by Gov. Sam Brownback.

Their plan is projected to raise $362.7 million in tax revenue for 2016 and fill in the bulk of a $406 million budget hole.

Democrats say that relying on sales tax to fill the bulk of the budget hole unfairly affects working class people more than the rich. Kelley pushed back against this criticism.

“I am not a fan of taxes in general. But it is the fairest tax because you are being taxed on what you purchase,” she said. “You purchase a lot, you’re taxed more. You purchase less, you’re taxed less. … But remember we’re dropping the rate on food … so we’re trying to offset it and mitigate some of those things that I know will be said about it.”

Kansas is one of a few states that tax food bought at the grocery store at the same rate as other purchases. Most states exempt food from sales tax. Kelley said lawmakers have wanted to lower the food sales tax for years.

Business owners’ perspectives

Some Wichita business owners say they are concerned by the prospect of a sales tax increase.

Nancy Robinson, an owner of Best of Times, a gift shop in Wichita, worried that the sales tax increase could hurt her business and help drive customers to online shopping.

“They (internet retailers) can undercut me on the prices. I can’t not charge them (custormers) sales tax,” Robinson said. “When times are already tough for a small business trying to compete with the internet, why would you want to make it tougher for me?”

Robinson benefits from the business income exemption, but she would rather lose that than see sales tax go up. “I certainly haven’t been able to add any jobs because not paying (income) tax,” she said with a laugh.

A document reviewed by the House Tax Committee showed that 60 percent of business owners benefiting from the exemption saved less than $1,000, not nearly enough to hire a new worker.

Andrew Gough, owner of Reverie Coffee Roasters in Wichita, said a sales tax increase could negatively affect his business, noting that his product is a luxury item that people might skip if their personal budgets take a hit.

Two-thirds of his business is credit card sales, Gough said, so a higher sales tax means he’ll face more in fees from credit card companies for processing those transactions. “I’m essentially paying more money, but I’m getting no benefit for it,” he said. “I mean it’s one thing if I was going to get a new road paved in front of my building.”

But Tad Snarenberger, who owns Tad’s Locker Room sports clothing stores in Wichita, said he’s not concerned by a sales tax increase. “I don’t think it’s going to hurt our business at all,” he said, explaining that past sales tax increases didn’t have a major impact. “I really don’t think anybody’s ever going to notice.”

Snarenberger said he thinks increasing sales tax is fairer than increasing other taxes.

Other proposed tax changes

The House bill also would eliminate income tax deductions except those for charitable contributions, mortgage interest and property taxes. The mortgage interest and property tax deductions would be reduced by 50 percent.

Deductions that would be eliminated include one for medical expenses and one for homeowners.

These combined changes would draw a projected $97 million in revenue. The loss of deductions would be partially offset by dropping the bottom tax rate from 2.7 percent to 2.55 percent, which would cost about $35 million.

Rep. Tom Sawyer, D-Wichita, called the income rate drop “very, very tiny” and said it would do little to help working class families when paired with the sales tax increase and loss of deductions.

“It’s very unfair to tax working families – nickel and dime them to death – with one of the highest sales tax rates in the country when we have businesses paying zero income tax,” Sawyer said.

Democrats supported a temporary sales tax increase in 2010 as a way to refill state coffers that had been drained by the recession. Sawyer said that increase was necessary because of a national crisis, whereas this one would be caused by “self-inflicted wounds.”

The proposal also includes Brownback’s plan to grant amnesty on unpaid taxes in the hope of raising $30 million by allowing people with back taxes to avoid the penalty.

The plan depends on $60 million being raised by a separate bill that would impose a fee on insurance providers. That bill stalled recently.

If both bills passed, the state would be left with a projected $16 million ending balance in 2016, which does not leave a lot of room for the state to fall short on its estimates over the next year. This January, for example, the state missed estimates by $47 million.

Kelley and others said lawmakers should look for additional spending cuts rather than use taxes to “pad the ending balance.” She said the goal for the tax committee should just be to get the state to about zero and that the rest should be done by the House Appropriations Committee, which handles spending.

Additional cuts?

During a House GOP Caucus meeting later in the day, Republicans sparred over whether the budget could be cut more.

“We take little chunks and we make bigger chunks and that’s how we fill gaps,” said freshman lawmaker Rep. John Whitmer, R-Wichita.

Rep. Ron Ryckman Jr., R-Olathe, the appropriations chair, pointed out that spending levels for most state services – apart from Medicaid and education – have been mostly flat since 2010.

Rep. Russ Jennings, R-Lakin, former commissioner of the state’s juvenile justice system, rebuked lawmakers who thought that state agencies could withstand millions of dollars in cuts, which he called an illusion. He said in the case of the state’s hospitals and correctional facilities, any more cuts would be dangerous.

“There comes a point where you can’t cut it any more than it’s been cut,” Jennings said. “And I can tell you from my own experience … we are there in terms of cutting agency budgets and believing somehow there must be another pound of flesh to squeeze out. It does not exist.”

Fate of business tax break

Last week, the tax committee advanced another bill, HB 2430, that would raise $133.6 million by placing business owners back on the income tax rolls. Rep. Mark Hutton, R-Wichita, said he thought it would be a mistake to pass a tax plan without that component, which he says addresses the inequity of the current tax system.

Despite his reservations, Hutton supported passing Kelley and Hedke’s plan out of committee as a way to move forward on a budget fix. He said he still hopes that House Speaker Ray Merrick, R-Stilwell, will bring HB 2430 to the floor and give lawmakers a chance to debate the issue.

Hedke said taking away the exemption would send a negative signal to businesses and discourage economic growth.

Lawmakers have faced intense pressure from interest groups, such as the Kansas Club For Growth and Kansas Chamber of Commerce, in recent weeks to preserve the business exemption.

This story was originally published May 13, 2015 at 11:10 AM with the headline "Kansas House proposal would raise sales tax to 6.85%, cut rate on food."