TOPEKA – Kansas lawmakers reviewed a proposal that would exempt the first $150,000 of business owner’s income and tax any income above that amount as a potential piece of a larger budget fix Tuesday.
The bill, HB 2434, drew opposition from business groups during a hearing of the House Taxation Committee. They want to maintain the current law, which allows the owners of certain businesses, such as limited liability corporations, to pay no income tax.
Rep. Mark Hutton, R-Wichita, said most business owners who now benefit from the exemption would still pay no tax under the plan. Data he provided to the committee earlier this month showed that more than 80 percent of the revenue lost because of the exemption went to business owners making more than $100,000 a year. They account for about 5 percent of the total number.
The bill would leave the first $150,000 of business income untaxed for the current tax year. It would drop that amount to $100,000 the following year.
The change would bring in about $55.7 million for fiscal year 2016, which starts in July, and $67 million the following year.
The state faces a shortfall of more than $400 million for 2016. Lawmakers have battled in recent weeks over whether the state should close the business exemption, created in 2012, as part of a larger budget fix. They have faced pressure from groups who oppose a change.
“It’s sending a terrible message nationwide to the business community,” said Eric Stafford, lobbying for the Kansas Chamber of Commerce. “This is simply an attempt to grab money when there’s a deficit from the business community. And the small business tax cuts are not to blame for the deficit.”
The business exemption was paired with a reduction of all income tax rates in 2012. The business exemption cost the state about $220 million in the current fiscal year and is projected to cost about that much next year. The rate cuts for individual wage earners accounted for about $666 million in lost revenue this year and are projected to cost about $774 million next year.
However, Hutton pointed out that wage earners are still paying taxes on their income. He asked Stafford if he could name another state that exempts business owners, while still taxing the general population. Stafford promised to look into it, but could not immediately think of another state.
Stafford distributed an editorial that ran in the Wall Street Journal last week as evidence that the tax cuts were working.
"It's really straight forward if the Wall Street Journal gets it,” commented Rep. Steve Brunk, R-Wichita, who has been a staunch proponent of keeping the current income tax plan. “It appears we're not ready to get it in this dome."
The editorial was written by Andrew Wilson, a fellow at the Show-Me Institute, which is funded by Missouri billionaire Rex Sinquefield, who has pushed for Missouri to adopt a tax plan similar to Kansas and hosted an event this year where Gov. Sam Brownback touted the tax cuts.
Stafford did not mention that the editorial was written by a Sinquefield associate, repeatedly referring to it as a “Wall Street Journal article.”
Asked about this omission afterward, he replied, “Who is Rex Sinquefield?”
“It was published by the Wall Street Journal. I don’t think I was necessarily trying to make it sound like it was the Wall Street Journal editorial board,” Stafford said. “I’m not trying to intentionally mislead…I knew it was written by a contributor, but I don’t know who the contributor is or what organization he works for. I just look at what they’re talking about in the editorial.”
Although the chamber and other business groups warned against changing the business exemption, Democrats say the plan does not do enough to close the loophole and bring equity to the Kansas tax system because it still by still exempting a large chunk of income.
“We’ve got to close that loophole better than this. It’s unfair to ask everybody else to pay more taxes until this loophole’s closed and this doesn’t do enough to do that,” said Rep. Tom Sawyer, D-Wichita, the ranking minority member on the committee.
“This bill’s actually the original governor’s tax plan,” Sawyer noted. “In the original tax plan the first $100,000 wasn’t taxed. I think it was interesting the chamber was in here arguing stick with the 2012 plan. Well, this was the original 2012 plan.”