Bill would lower Kansas sales tax on food, remove business tax break

A Wichita lawmaker wants to roll back a tax exemption for business owners as a way to pay for sales tax cut on groceries.

Rep. Mark Hutton, R-Wichita, said that HB 2444 would help restore fairness to the state’s tax system.

The bill, which is scheduled to have a hearing in the House Taxation Committee on Tuesday afternoon, removes an income tax break for the owners of limited liability companies and other pass-through businesses, a policy championed by Gov. Sam Brownback, and uses the additional revenue as a way to lower the sales tax on groceries.

“Everybody eats,” Hutton said, contending that the bill would do more to help the average Kansan than the tax break for business owners.

Hutton said that the bill was designed to be a conversation starter.

Most states either exempt food from sales tax or tax it at a much lower rate than other items. Kansas taxes food at the full rate of 6.5 percent, the second highest rate in the nation after lawmakers raised it last year in the face of a budget hole. In some Kansas cities, the overall rate approaches 10 percent when local sales tax is counted.

Rolling back the income tax break would generate about $261 million, according to the bill’s fiscal note, which was prepared by the Kansas Department of Revenue. The department initially estimated that doing so would allow Kansas to lower the state sales tax on food to 2.6 percent, but Hutton said that in more recent conversations with the agency it looks like the rate would be closer to 2.9 percent.

Rep. Tom Sawyer, of Wichita, the ranking Democrat on the committee, said that he supports both repealing the business exemption and lowering the food sales tax. However, he said that it may be impractical to cut the rate on food when the state faces a budget shortfall for the current year.

“Really, with the budget situation we’re in, I think to be responsible, the thing to do is to repeal the business tax exemption and hold off on beginning the reduction on food sales tax until we’re in a better fiscal state,” Sawyer said. “But it’s still something I’d love to do.”

Hutton acknowledged that using the revenue to pay for a sales tax cut on groceries wouldn’t directly address the fiscal problems of the state, but said it would ensure fairness in the state’s tax system.

Hutton owns a construction firm and as the owner benefits from the business income tax exemption. His employees, on the other hand, pay state income tax on their wages. He said that he’s spoken to numerous business owners throughout the state “uneasy with this arrangement and believe that is kind of a slight to our employees.”

He also argued that cutting the tax on groceries could spur economic growth.

“One of the arguments with the whole business-income exemption was that it put more money back into the economy. This is money that business owners had that they could then spend on their businesses,” Hutton said. “I believe discounting the sales tax (on groceries) and putting that money back into everybody’s pocket will actually be a more direct path for those funds to get back into our economy.”

The proposal faces opposition from influential interest groups Americans For Prosperity and the Kansas Chamber of Commerce.

Jeff Glendening, AFP’s state director, said rolling back the business income tax exemption would break a promise to business owners. “You’re taking money from job creators,” he said.

Eric Stafford, the chamber’s lobbyist, said that his organization opposed raising the sales tax last year, but that it won’t support the sales tax cut “at the expense of the business community.”

Hutton led a coalition last year that tried to roll back the income tax exemption for business owners, but was stymied when the governor threatened to veto any bill that rolled back his signature policy. The governor has made similar comments this session and his spokeswoman confirmed Monday afternoon that Brownback would oppose the bill.

“I believe my job as a legislator is to do my best to put it on the governor’s desk,” Hutton said when asked about opposition from Brownback. “And that’s all I can do.”

This story was originally published March 14, 2016 at 11:39 AM with the headline "Bill would lower Kansas sales tax on food, remove business tax break."