Tax compromise reached; House will vote first

House and Senate negotiators agreed on a new tax-cutting proposal this afternoon, setting the stage for a vote in the House as early as Thursday afternoon.

The plan emerged after a series of meetings where the senate, controlled by moderate Republicans, offered plans that the conservative House members rejected because the tax cuts weren't aggressive enough.

But the House moved slightly toward the Senate's requests. Wichita Republican Sen. Les Donovan then agreed to the proposal, although he said he hadn't yet discussed it with the Senate's leadership.

"What we need to do is somehow, some miracle, convince enough people on the Senate side to vote for this," he said. "This is good for everybody in the state of Kansas."

The new proposal would make the first $100,000 of nonwage income exempt from taxes for roughly 191,000 limited liability companies, subchapter S corporations and sole proprietorships from 2013 to 2016. That's a little longer than previous plans. Then it would exempt the first $250,000 in 2017 before eliminating the tax in 2018.

Meanwhile, it would collapse the state's three-tier tax brackets to two and tax married couples at 3 percent on their first $30,000 of income. But it would phase in cuts for income beyond that as follows: 5.5 percent in 2013 and 2014, 5.4 percent in 2015, 5.2 percent in 2016 and 5 percent in 2017. In 2018, the rate would be permanently set at 4.9 percent, which would please Gov. Sam Brownback, who says he wants a rate below 5 percent.

The proposal amounts to a $194 million tax cut in 2014. That can also be viewed as a reduction to state revenue to fund state services. In 2018, when the plan is in full-effect, it would amount to a $563 million tax cut.

While the cuts reduce revenue to the state, they aren't projected to create a budget deficit like several previous proposals. In 2014, the state is projected to have a $574 million ending balance, which equates to 9.3 percent of the state's general fund budget. In 2018, the state is projected to have a$356 million surplus -- or 5.2 percent.

The projections assume roughly $300 million in savings from a Medicaid reform effort known as KanCare. Democrats have said they're skeptical about the projected savings.

St. Marys Republican Rep. Richard Carlson said that he expects Gov. Sam Brownback will like the new proposal and support it instead of a larger tax-cutting bill that is headed toward his desk. That plan would eliminate taxes on most businesses in its first year and drop individual income tax rates to 3 percent and 4.9 percent. It was projected to produce a budget deficit of more than $2 billion by 2018.

But it's unclear how the plan will fare in the House, where many conservatives had hoped for a more aggressive tax cut bill. And Donovan has already said he doubts the bill's prospects in the Senate.

“I don’t have much hope that the Senate is going to approve this offer," Donovan said at an earlier meeting where the proposal was discussed.