Kansas homeowners may have to pay more property taxes as part of a tax package being developed by the Kansas Legislature to close the state’s budget hole.
Sen. Les Donovan, R-Wichita, struggled Tuesday to get the Senate Tax Committee to craft a tax package to fill a projected budget hole of more than $420 million for next year.
One of the few items to win committee approval was a proposal to eliminate the homestead exemption.
Homeowners now are exempt from paying the state school mill levy on the first $20,000 of their residential property’s appraised value. Eliminating the exemption would mean that homeowners would pay an extra $46 in property tax. That would bring in an additional $45.2 million for next fiscal year to go toward school funding.
It’s only a small piece of a tax package Donovan is working to develop. He said it was one of the fairest moves the Legislature could make, because “it hits everyone.”
The Kansas Association of Realtors opposes the loss of the exemption, said its lobbyist, Luke Bell.
“Property taxes, in our opinion, is one of the most damaging taxes you can charge against people, because it affects their property. Unlike income taxes, which you pay if you actually make money, property taxes hit you regardless across the spectrum,” Bell said. “This has been law for a very long time. … If we’re assembling a tax package, I don’t see why that is the first piece that makes it in here.”
Senate Minority Leader Anthony Hensley, D-Topeka, said he authored the bill that created the exemption in 1997 and eliminating it would be a mistake.
“It’s a benefit to low-income people, for the most part. It’s a benefit for everybody … but in particular it really helps people living on fixed incomes, which is older people,” he said.
Donovan said the repeal of the homeowner’s exemption is just one piece of the puzzle, and he wishes his committee would add more pieces.
The committee made little overall progress and voted to table Gov. Sam Brownback’s proposal to raise taxes on alcohol and cigarettes about five minutes into the meeting. That proposal was projected to bring in $108 million in revenue.
“Well, how hot does it get in Topeka in July?” Donovan quipped after that action.
Lawmakers are in the second week of their wrap-up session. They’ll be in Topeka until they can come up with a plan to balance the budget. Donovan’s fellow Republicans were in no rush to advance tax increases on Tuesday, and Democrats weren’t about to toss him a lifeline.
“I don’t know what they want. I wish I knew,” Donovan said after the meeting. “I agree I don’t think everybody’s on board with how dire our time schedule is. It is getting very critical that we get something moving, that we get something done. And we’re not trying to raise $10,000, you know, for a bake sale. We’re trying to get the budget fixed for the state of Kansas.
“I did not expect a motion to table a major bill,” Donovan said.
Cigarette, alcohol taxes
The governor proposed in January raising the state tax on each pack of cigarettes from 79 cents to $2.29. The proposal has been unpopular among lawmakers, especially those who hail from counties that border Missouri, where the state tax on a pack of cigarettes is 17 cents. They fear that the steep tax hike would drive business across the state line.
“I don’t think we should be saying don’t tax him, don’t tax me, go tax that guy behind the tree,” said Sen. Mary Pilcher-Cook, R-Shawnee, who made the motion to table the tobacco and alcohol tax increases. She said she opposed singling out specific products.
Donovan wanted the committee to discuss a possible compromise, increasing the tobacco tax but less than the governor had proposed. But tabling the legislation means it is halted indefinitely until a lawmaker makes a motion to revive it.
The committee took no action on the other major piece of the governor’s tax plan, which would slow scheduled income tax cuts and reduce exemptions.
Nor did it take on most of the other ideas Donovan floated, such as ending a sales tax exemption for utilities for residential properties, ending an income tax exemption for rents and royalties or imposing a tax on e-cigarettes.
In addition to the homestead exemption, the committee also moved forward with legislation to change the way automobiles are taxed as a way to bring in more money for schools.
SB 259 would lower overall property taxes on automobiles but also make them subject to a school mill levy from which they are currently exempt, bringing in an additional $13.8 million for schools in fiscal 2017. However, this policy change would also cost local governments across the state $80.3 million that year.
The committee put the two approved tax proposals into HB 2109. Donovan intends to resume work Wednesday on crafting a tax package.
Tax credit proposal
He floated an idea of his own to replace the income tax exemption for certain business owners with a 1 percent tax credit for each employee on a company’s payroll. He said this would help tie the tax break more directly to job growth and have less of an impact on state coffers.
Donovan, who owns a car dealership in Wichita, explained the plan by using his own business as an example.
“I have 65 employees. As I said, my payroll last year was $3.2 million to the penny. So I’d get a tax credit of $32,000. … But currently I’m getting much more than that. And I have no problem (paying taxes on income),” Donovan said. “Yeah, I’ll pay tax on that. I’ll run this by the governor; I don’t know what he thinks of that.”
Brownback has been vocal in his opposition to changing the exemption for owners of limited liability corporations and other types of businesses.
During a House Tax Committee meeting Tuesday, Rep. Mark Hutton, R-Wichita, questioned why the governor has been so stubborn on the LLC exemption, which was part of the 2012 tax law Brownback championed, while he has been willing to slow tax cuts.
Richard Carlson, legislative liaison for the Department of Revenue, said the LLC exemption has been critical to job growth. Carlson blamed the state’s revenue woes on the national economy rather than the state’s tax policy changes.
But Democrats pressed him on this point. Rep. Kathy Wolfe Moore, D-Kansas City, noted the national economy has outpaced Kansas in the past year.
Republicans responded by blaming the budget hole on increases in education and Medicaid spending and on the slow recovery of Wichita’s aviation industry since the recession.
Carlson said the administration is hoping to come up with a solution that leaves the state with an ending balance of about $75 million to $100 million. That’s on top of the $420 million needed to fill the budget hole.
Near the end of the House committee meeting, Rep. Gene Suellentrop, R-Wichita, offered a bill that he said would serve as a global fix. He offered the bill conceptually and said he hoped to have the language ready to review by the committee by Thursday.
Suellentrop did not offer details when pressed by reporters after the hearing to describe the plan.
“We’ve looked at these individually and right now, again, gentlemen, we’re looking at them as a package,” Suellentrop said. “And it’s going to be consumption. It’s going to be adjustment of income taxes. And it’s going to be an adjustment of the rates going forward.”
He said lawmakers have the clay, but now they need to sculpt it into a plan, explaining that plan would be a combination of various ideas heard by the committee throughout the session.
“It’s going be a broader-base consumption tax plan that pulls more people into it without having to raise the rates so much,” Suellentrop said.