Politics & Government

Kansas House panel considering bill that would cap business owners’ income for tax breaks

The Wichita Eagle

TOPEKA – Stifled last week in its effort to pass a tax plan relying heavily on sales tax hikes, the House Taxation Committee is entertaining a plan to roll back income tax breaks for business owners.

The committee announced Monday that it will hold a hearing on HB 2434, which would put a cap on the amount of income that goes untaxed for owners of limited liability companies, sole proprietorships and corporations organized under Subchapter S of the federal tax code.

Under the bill, the zero tax rate would still apply, but only to the first $150,000 of a business owner’s profit income next year. The year after, the threshold would drop to $100,000, according to the committee chairman, Rep. Marvin Kleeb, R-Overland Park.

The change would likely reclaim about $45 million to $55 million for the state, Kleeb said.

It’s not a new idea. Income caps were part of the original discussion on the tax plan back in 2012 but fell away during the political brinksmanship between the House and Senate.

LLCs, Subchapter S corporations and other structures are called pass-through because the companies themselves pay no federal income tax. Instead, the federal tax code requires the business owners to pay taxes on their personal income from business profits.

The Legislature set the state income tax rate for owners of pass-through businesses at zero, leading to deep drops in revenue and a current $406 million budget hole.

What was billed as an exemption for about 190,000 small-business owners turned out to actually be an exemption for 330,000.

And analysis of tax returns this year showed that most of the tax break – 83 percent – went to the top 5 percent of business owners, all of whom make more than $100,000 a year.

About half of that went to the top 1 percent, who make $500,000 or more.

The idea of an income cap was floated again earlier this year by Sen. Jim Denning, R-Overland Park, who said at the time that $100,000 to $150,000 being exempt from income taxes should be more than enough to help small businesses – the oft-stated goal of the tax plan.

The tax committee moved a bill to the floor on Friday that relied heavily on increases in sales taxes and consumption taxes on tobacco, liquor and fuel to balance the budget.

It was overwhelmingly defeated in a voice vote.

Gov. Sam Brownback, who made the exemption on pass-through business taxes the centerpiece of his economic plan, reiterated Monday that he remains committed to the income tax breaks.

“Everybody’s negotiating,” Brownback said. “What I’m trying to do is move off of the income tax and more onto consumption taxes to support state government … and we’re going to keep working with people.

“At the end of the day, there will be a budget. It will balance. That’s the beauty of the place.”

Sen. Ty Masterson, R-Andover and chairman of the Senate committee working to balance the budget, said getting any tax plan through the divided House will be the major hurdle to closing out the legislative session, which this week went beyond the planned 90-day limit.

He said he’s waiting to see how much, if any, additional revenue the House decides to generate through tax increases.

“That leaves me a number, and if I have to cut more (from the budget) to make it balance, I will make it balance,” Masterson said.

Kleeb said he still hopes his committee will be able to build an acceptable global tax plan and that the income caps could be part of it. But he also wants the committee to be familiar with other ideas that might come up in tax negotiations with the Senate.

“I just want to have a hearing on these concepts as they’re introduced and proposed so that we can know what’s in them and vet them fully,” he said.

Contributing: Bryan Lowry

Reach Dion Lefler at 316-268-6527 or dlefler@wichitaeagle.com.