Brownback signals willingness to compromise on tax exemption

Gov. Sam Brownback told reporters Tuesday that he is willing to discuss compromises with legislative leaders on his signature tax policy, an exemption for certain business owners.

Brownback’s willingness to compromise comes as lawmakers get ready to discuss a bill to repeal the exemption in its entirety.

Kansas eliminated tax on nonwage income for the owners of limited liability companies and other pass-through businesses in 2012 at Brownback’s urging. Brownback says the policy has spurred small-business growth.

But the exemption has faced criticism as the state struggles with revenue shortfalls. Business owners who make $500,000 or more a year account for 40 percent of the overall tax savings but make up less than 1 percent of businesses eligible for the exemption.

“We want to maintain the heart of this, which is small business,” Brownback said Tuesday. “And people have complained, saying, ‘Well, we don’t think the lawyers shouldn’t be taxed.’ And I think we need to do refining, and so that’s what I’ve been putting forward.”

Brownback has proposed taxing rents and royalties, income now exempt under the law, and increasing the annual filing fee for businesses from $40 to $200. Those two changes would bring in an estimated $73.6 million.

Many lawmakers want to go further. The House Taxation Committee will hold a hearing Thursday on a bill that would repeal the business exemption and bring in an estimated $250 million a year in additional revenue.

Kansas faces a projected shortfall of more than $900 million for the next 18 months.

Brownback said Ohio has enacted a similar tax policy but exempts only the first $250,000 of business owners’ income. He said he was willing to talk to lawmakers about other alternatives, a contrast to 2015, when he threatened to veto a rollback of the exemption.

“We just mean to maintain the heart of it. Small business struggles anyway,” Brownback said. “Go talk with one of those guys about their day. And it’s a long day full of a lot of regulations and difficulties.

“And you want more of these guys starting out, because they’re the primary job creator and you want more of them growing, so you’re trying to make their day a little bit better. And that’s the heart of it.”

Asked what he means by small business, Brownback said “the guy that runs the little body shop over here that does the car repair” and “the guy who has the barbecue restaurant over here.”

Under the current law, any size business can qualify for the exemption as long as it is organized as a pass-through business, such as an LLC or S corporation.

House Minority Leader Jim Ward, D-Wichita, called Brownback’s comments “a strategic retreat” rather than a true offer to compromise.

Ward predicted the governor will allow the exemption to be rolled back in order to preserve another piece of his tax policy. Kansas previously had three tax brackets, but in 2012, the Legislature approved legislation to merge the top and middle brackets and cut rates across the board. Ward said in order to put the state on sound financial footing, it also needs to undo this tax change.

Senate Majority Leader Jim Denning, R-Overland Park, on the other hand, said he thinks the governor is sincere in his desire to compromise.

“He knows that there’s a strong will to completely repeal the pass-through policy,” Denning said.

This story was originally published January 17, 2017 at 2:00 PM with the headline "Brownback signals willingness to compromise on tax exemption."