Politics & Government

Kansas House rejects proposed sales tax increase

House Speaker Ray Merrick, R-Stilwell, speaks with Richard Carlson, legislative liaison for the Kansas Department of Revenue, during Friday's tax debate.
House Speaker Ray Merrick, R-Stilwell, speaks with Richard Carlson, legislative liaison for the Kansas Department of Revenue, during Friday's tax debate. The Wichita Eagle

TOPEKA — A bill to raise state sales tax revenue by more than $270 million faced overwhelming rejection in the Kansas House on Friday.

SB 270 would have raised the state sales tax rate from 6.15 percent to 6.85 percent but dropped the rate on food bought at grocery stores to 5.9 percent.

Lawmakers rejected it on a voice vote after two hours of debate. House leaders did not seek votes in support of the bill, a GOP staffer said.

The vote leaves lawmakers still struggling to find ways to fix a projected $400 million deficit in the 2016 budget. Some lawmakers want more spending cuts, though no specific proposals have been offered. Others say any solution should include changing a 2012 exemption that allows 330,000 business owners to pay no income tax.

“I just don’t see an endgame right now,” said Rep. John Rubin, R-Shawnee. “We obviously have to have one, but I don’t know what it is.”

House Speaker Ray Merrick, R-Stilwell, issued a statement saying, “This is the process at work. Our job is to find a proposal that will gain support from 63 members, and that takes time, deliberation, and consensus building. We are going to find a solution and solutions to difficult problems don’t come easily.”

During the debate, Rep. Marc Rhoades, R-Newton, tore into Republican colleagues, contending that many of them wanted the sales tax bill to “die a big, fiery death.”

Rhoades, who stepped down as appropriations chair last year after feuding with House leaders, repeatedly questioned whether the Appropriations Committee had truly put in the effort to find spending cuts and avoid a tax increase.

He said the only tax increase he could support would be a tax on consumption, such as the sales tax. He accused House leaders of favoring another plan that would eliminate the income tax exemption for business owners.

SB 270 did not touch the tax exemption for business owners. An amendment to place business owners back on the income tax rolls was defeated by a wide margin on a voice vote.

“If there’s any silver lining today, it showed lack of support for the tax of small businesses out of the House,” said Eric Stafford, lobbyist for the Kansas Chamber of Commerce, which has opposed changing the business exemption.

The chamber has quietly backed the sales tax increase as a preferred alternative, even though it attacked Democrats and moderate Republicans in the 2012 elections for supporting a temporary sales tax increase in 2010 to fill a budget hole.

“What’s changed is in 2010 they increased taxes to spend more money,” Stafford said when asked about the reversal. “They were looking at increasing taxes before they were looking for cuts. We got tax cuts in 2012 on all Kansans and I think what the House folks are looking at now is to further reduce income taxes in exchange for the sales tax.”

Democrats, who have long criticized the business exemption, did not support the amendment to do away with it. Rep. Brandon Whipple, D-Wichita, said the underlying bill still raised sales tax too much, which Democrats view as regressive.

Rep. Marvin Kleeb, R-Overland Park, the House Taxation chair, urged the House to vote down the amendment, saying that the income exemption should be a separate debate.

He said a 6.85 percent sales tax rate was too high for many House members to support but that feedback showed many lawmakers are interested in lowering the rate on food. Kansas is one of the only states that tax food at the same rate as other products.

“The whole idea of passing a bill out from Tax Committee this week was to have this very discussion. We weren’t trying to come up with something that was necessarily going to pass,” Kleeb said. “It was to get it out here so that it could be vetted. Particularly the consumption-only approach needs to be talked about.”

Gov. Sam Brownback has repeatedly said he prefers raising consumption taxes. Asked if the House vote was a rebuke of that philosophy, he replied: “This takes a lot to figure these out. It’s like a combination lock with 14 numbers and you’ve got to get all of them right.”

A ‘lot of frustration’

Kleeb’s committee will return to its task of crafting a plan Monday.

He acknowledged that it won’t be easy to create a tax plan that Republicans, who hold majorities in both the House and Senate, can support. “There’s a lot of frustration and there’s a lot of emotions right now because our caucus does not raise taxes easily,” he said.

Rubin said he and other fiscal conservatives don’t support taking back the business tax break. But raising consumption taxes is also unpalatable, he added, contending that would risk making businesses near the border less competitive.

“I know Johnson County legislators as a group, certainly including myself, oppose the hike in the gasoline tax, the hike in the tobacco tax, the hike in the cigarette tax. … I told the governor we already have too many people in Johnson County going over to Missouri to buy their gas and their cigarettes and their alcohol now,” he said.

Rep. Melissa Rooker, R-Fairway, a moderate, complained that many of her colleagues have avoided dealing with the real problem, the 2012 law that cut individual income tax rates and included the exemption for certain business owners. “What they’re doing right now is fishing,” she said.

Rep. Carolyn Bridges, D-Wichita, said she thinks any solution will have to address the business owner tax break.

“I believe we need to put those people back on the tax rolls,” she said. “Interestingly enough, most of the people I talk to who are getting that, most business owners have said, ‘Hey, we ought to be paying something.’”

She said she would prefer to see business profits taxed at the same rate as workers’ salary earnings but could live with a plan to have businesses pay 2.7 percent income tax on earned business income and 4.6 percent on passive income from royalties and rentals.

Not going ‘backwards’

Rep. Kasha Kelley, R-Arkansas City, one of the co-authors of SB 270, said during the debate that the media refuses to report that the tax cuts – and the business exemption specifically – were spurring job growth.

Kelley attended a hearing last month where analysts from the nonpartisan Legislative Research Department and Department of Revenue said there is no hard data to support that the business exemption is spurring job growth.

Data from the U.S. Bureau of Labor Statistics shows that the state has grown jobs at about the same rate as before the tax plan went into effect.

Kelley defended her claims when asked about them afterward.

“We’ve made some significant changes and we certainly have not gone backwards. And we have not gone backwards in an economy that is incredibly challenging, and that has to count for something,” she said. “We might have some seeds starting to sprout here. … We’re doing much better than we would have under previous tax and spend policies.”

She also said her bigger complaint was that it’s been “broadly written that the 2012 tax plan created this hole. That is some portion of revenue lost, but you have to cut spending commensurately with a plan like that.”

Contributing: Dion Lefler of The Eagle

Reach Bryan Lowry at 785-296-3006 or blowry@wichitaeagle.com. Follow him on Twitter: @BryanLowry3.