TOPEKA — A proposal to place Kansas business owners back on income tax rolls would fill half of the state’s budget hole, but it faces strong opposition from business groups.
House Bill 2430 would eliminate an exemption that allows owners of certain businesses, such as limited liability corporations or S corporations, to pay no income tax.
Instead, business owners with at least one full-time employee or the equivalent would pay income taxes at the lowest rate – currently 2.7 percent. Business owners with no employees would receive no tax break.
“The intent of this is helping the businesses that are job creators,” said Rep. Marvin Kleeb, R-Overland Park, who crafted the bill with Rep. Mark Hutton, R-Wichita. “There are lots of businesses and sole proprietorships that aren’t job creators. Not against those folks at all. But if we do need to find revenue and we want some fairness, perhaps this is something to consider.”
The current tax exemption for business owners, championed by Gov. Sam Brownback in 2012 as a way to boost jobs, has come under scrutiny as the state faces a projected budget gap of more than $420 million next fiscal year. Lawmakers have questioned both the fairness of exempting 330,000 business owners from taxes and the policy’s effectiveness at growing jobs.
The policy change is projected to bring in $232 million for fiscal year 2016, which starts July 1 of this year, and about $176 million the year after that.
Eric Stafford, lobbyist for the Kansas Chamber of Commerce, opposed the new bill and said at a House Tax Committee meeting Thursday that it “unravels the gains” made in 2012. He added that lawmakers should cut the budget instead of raising taxes but did not provide specific suggestions for cuts.
The current premise
The LLC exemption in its current form is fundamentally flawed, and the data does not support the premise that it is luring companies to the state or spurring growth, Hutton said.
“I would also go so far today to suggest it never will,” he said. “The reason is that the individual tax savings are not significant enough to spur employment growth or lure companies to our state, yet it’s costing our state over $200 million.”
He provided data from the Kansas Department of Revenue that showed 53 percent of the individuals benefiting from the exemption made $25,000 or less, for an average savings of $158. Business owners making more than $500,000 – which represent less than 1 percent of those benefiting from the exemption but account for 40 percent of the lost revenue – had an average savings of $38,310. Hutton contended that would not be enough to hire a swath of new employees.
“The argument that $200 million in the hands of the taxpayer is better than in the hands of the state is not without merit, but the financial reality of our state and the basic tax policy fairness needs to take precedent in this matter,” Hutton said.
Rep. Steve Brunk, R-Wichita, said job creation was not the only reason the state created the exemption for businesses and that having the money stay with business owners would stimulate the economy more than sending it to the government.
The individual savings of the companies “may not cause them to create a specific job, it will allow them to reinvest that money,” he said. “It may cause them to utilize that money to pay off a debt to that company. It may cause them to purchase a new piece of machinery and equipment.”
Rep. Steve Johnson, R-Assaria, said he had spent the weekend looking at economic data trying to discern a connection between tax policy and economic growth. “Inconclusive is the best I could come up with,” he said.
Brownback has defended the LLC exemption as a way to spur job growth. He wants to slow scheduled rate cuts for wage earners to help fill the budget hole.
Hutton said taxing business owners would allow the state to keep its promise to everyone and reduce individual rates across the board rather than taxing some people while others pay no income tax.
Cutting spending, raising taxes
The Kansas Chamber of Commerce and other business groups strongly oppose changing the policy.
Stafford criticized the bill for being retroactive – it would apply to businesses from Jan. 1, 2015, forward – which he said would destabilize many businesses. He called on lawmakers to make spending cuts rather than raise taxes.
“We knew this day was coming. It’s not a surprise revenues aren’t what they used to be,” he said.
Rep. Ron Ryckman Sr., R-Meade, repeatedly asked Stafford to recommend a specific spending cut. Stafford would not, quipping that he had not personally run for elected office on a platform to keep taxes low.
Rep. Kathy Wolfe Moore, D-Kansas City, pressed Stafford about whether he really thought it was possible to find $400 million worth of cuts in the budget. She also asked him to name a specific example. He would not.
Luke Bell, the lobbyist for the Kansas Association of Realtors, acknowledged that taxes would be raised to fill the budget hole, but recommended raising sales tax as a better option than raising income taxes.
“I’m not going to stand up here and say we’re going to find $500 million in efficiencies in state government. We’re not going to have some magical pixie fairy come in here and give us $500 million. Let’s face it. We know you’re going to have to increase taxes,” Bell said. “We think to the extent possible you should have to increase taxes as broadly as possible.”
Bell said lawmakers need to give the tax cuts more time to work.
“This tax plan has only been in effect for basically 26 months. Wanting this tax plan to produce results at this point in time is like giving your child a bike and expecting them to be Lance Armstrong a week later,” he said. “In our opinion, we don’t think there’s been enough time to truly see if the tax plan is going to work.”
The bill would also place rents and royalties back on the income tax rolls. Kleeb pointed out that exempting rents from the income tax rolls means that a person living in California who owns property in Kansas pays no taxes.