Kansas taxpayers would keep more of their earnings and thousands of businesses eventually wouldn’t pay taxes on their profits under a proposal House and Senate negotiators agreed on Wednesday.
Gov. Sam Brownback said he supports the plan and urged the House and Senate to approve it. The House could vote on the plan as early as this afternoon.
Some conservative Republicans in the House are expected to balk at the new tax plan because it is not as aggressive as a deficit-inducing proposal that lawmakers rammed through last week after a series of political maneuvers that enraged moderate Republicans and Democrats.
But, with Brownback’s support, it appears poised to pass.
Prospects are less clear in the Senate. Key lawmakers have been skeptical about how many jobs income tax cuts can generate and have raised concerns about how slicing away state revenues could impact the state’s ability to fund education and other services.
“What we need to do is somehow, some miracle, convince enough people on the Senate side to vote for this,” said Sen. Les Donovan, R-Wichita, who has been at the center of tax negotiations for months. “This is good for everybody in the state of Kansas.”
But with less revenue flowing to the state, the proposal could put more pressure on the state to hold spending down after already making many cuts in the wake of the recession.
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.
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.
The cuts would impact businesses large and small, ranging from a barber shop to a subsidiary of Koch Industries to businesses without employees.
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 Brownback, who says he wants a rate below 5 percent.
It would trim the state’s portion of the earned income tax credit that benefits low-income working families. Kansas currently provides qualified workers 18 percent of the federal credit. Current law would drop that to 17 percent next year, but the new tax proposal would reduce it to 15 percent, giving needy families slightly less than they have received in prior years.
The proposal also would eliminate about 15 other tax credits, many of which are not commonly claimed. Among them are credits that reimburse taxes paid by people with disabilities who buy specialized equipment.
The standard deduction of $4,500 for heads of households would not change. Renters would no longer be able to claim the homestead refund, but lawmakers agreed to plow that money back into the program and boost the maximum claim for homeowners from $700 to $800.
Local governments would get a share of $45 million in state money each year after 2014 to help hold down property taxes. And six-tenths of the 1 percent sales tax increase approved in 2010 would be allowed to expire in July 2013, as is called for under current law.
The proposal amounts to a $194 million tax cut in 2014. That can also be viewed as a reduction in 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.
The tax cuts are partially paid for by eliminating severance tax exemptions for oil drillers that produce more than 150 barrels a day in new oil fields, such as those being tapped with horizontal drilling in south-central Kansas. That is expected to generate $25 million for the state in 2014 and $55 million in 2018.
Rep. Richard Carlson, R-St. Marys, who has also been at the center of tax negotiations, said the tax cuts will probably only generate modest economic growth in its first year or two. But he said he expects the growth to compound a few years later and produce more jobs as people and businesses retain more of their income.
“I think it has to be a little big of a slow take-off,” he said.
Carlson said that he expects Brownback will like the new proposal and support it instead of a larger tax-cutting bill that is headed toward his desk.
That plan started as Brownback’s initial tax cut proposal. But senators altered the plan to retain popular tax credits and deductions Brownback had planned to eliminate to help reduce the impact of tax cuts.
The Senate voted the plan down in a 20-20 vote, but nine senators changed their votes in order to allow for negotiations with the House after Brownback pressured them.
When the House heard the Senate wouldn’t approve an alternative tax bill negotiated by a six-member panel of lawmakers, conservatives in the House pushed the massive tax cut through, sending it to the governor and enraging senators and Democrats.
That plan, which is expected to reach Brownback’s desk in coming days, 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.
Many lawmakers have called that bill irresponsible. But Brownback said he thinks it could produce thousands of new jobs and, paired with reduced spending, the bill could work.
In a statement issued after lawmakers agreed on the new plan, Brownback said that the proposal “gets Kansas on the path to a pro-growth tax policy that will grow the economy and create jobs. Both chambers should approve the compromise bill and send it to me.”
“Otherwise, I have received Senate Sub for HB 2117 and will sign it,” he continued. “Kansans will have a pro-growth tax cut this year.”