Politics & Government

Kansas Senate panel moves Donovan tax plan to the floor

Sens. Mary Pilcher-Cook (left) and Julia Lynn at Senate tax committee meeting Tuesday.
Sens. Mary Pilcher-Cook (left) and Julia Lynn at Senate tax committee meeting Tuesday. The Wichita Eagle

The House and Senate plans would add 5 cents per dollar to the gasoline tax. A previous version of this story was incorrect.

TOPEKA — Kansas senators will consider a tax plan that includes a variety of increases in income and sales taxes.

The Senate Tax Committee agreed Tuesday to move the plan to the floor in an effort to break the logjam that has forced the session into overtime after weeks of bickering between lawmakers.

The Legislature can’t adjourn until it finds enough new revenue, cuts or both to fill a $406 million budget gap. The Senate plan, contained in HB 2109, passed to the floor without a recommendation.

Meanwhile, the House continued to weigh its options after voting down a bill last week that primarily relied on sales tax revenue to fill the hole.

In proposing the Senate plan, Sen. Les Donovan, R-Wichita, who chairs the committee, said he wanted to spread the tax hikes as broadly as possible.

“We’ve got to learn the art of compromise. Somehow it seems to have disappeared. Compromise is not a dirty word,” he said Tuesday.

He said a vote on the plan would likely come this week.

The Donovan plan would repeal the centerpiece of Gov. Sam Brownback’s 2012 tax reform, a zero tax rate on non-wage income for owners of limited liability companies, farms, sole proprietorships and corporations organized under Subchapter S of the federal tax code.

Those structures are called pass-through businesses 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.

Donovan’s plan proposes replacing the zero tax rate on those business owners with a credit based on their payroll. He said that would focus the tax relief on job creation, which was the goal of breaks for businesses in the first place.

The change would generate an estimated $81.9 million for the state in the first year.

In addition, tax rates for wage earners would be frozen at current levels, rather than declining further as scheduled in current law. That would generate $19.9 million.

Democrats have called for a repeal of the business exemption for years, but Sen. Tom Holland, D-Baldwin City, criticized Donovan’s idea to replace it with a payroll tax credit. He said there was little data to support the notion that the payroll tax credit would spur job growth.

“We’re probably just going from one bad plan to another,” he said.

The Senate plan also would:

▪ Lower the state sales tax on food from 6.15 percent to 6 percent, while raising the rate on all other purchases to 6.5 percent. That’s estimated to raise $134 million in revenue.

▪ Add 5 cents per gallon to the gasoline tax, generating nearly $82 million.

▪ Speed up the ongoing process of eliminating income-tax deductions, $97 million.

▪ Raise the cigarette tax 50 cents, $40.4 million.

▪ Raise taxes on other tobacco products, $2.84 million.

▪ Freeze other tax rates.

▪ Lower taxes on newer vehicles to spur car sales, estimated to generate about $8 million more overall as people replace older, lower-taxed vehicles.

Coupled with a proposed tax amnesty program expected to bring in about $30 million, Donovan’s plan would generate about $495 million overall, leaving the state a projected ending balance of $89.5 million.

Two tax proposals

Members of the House Taxation Committee spent Tuesday reviewing two tax proposals after the House rejected a plan to increase sales taxes last Friday.

Rep. Marvin Kleeb, R-Overland Park, the committee’s chair, said he had no time line for when his committee would pass out a new bill.

One bill, HB 2434, would exempt the first $150,000 of business owner’s income and tax it after that. In the next tax year, that amount would drop to $100,000.

The change would bring in about $55.7 million for fiscal year 2016, which starts in July, and $67 million the following year.

It drew opposition from business groups who want to keep the current law.

The other bill, SB 31, a proposal from Rep. Gene Sullentrop, R-Wichita, would rely on a combination of taxes to fill the hole.

It would maintain the exemption for most business income, but would tax “guaranteed payments,” which are payments to partners of a limited liability corporation. That would bring in an extra $23 million. Suellentrop called this a “middle of the road approach” to addressing the controversy over the business exemption.

Rep. Tom Sawyer, D-Wichita, observed that the dollar figure that Republicans were willing to tax of business income appeared to be shrinking with each new plan.

Rep. Mark Rhoades, R-Newton, successfully offered an amendment to remove a portion of the bill that would have frozen income tax rates in 2016. That means the state would continue on “the march to zero” that conservatives promised when they passed the original tax plan in 2012.

After Rhoades’ changes, the bill would fill the shortfall and leave about an extra $70 million in state coffers in 2016, but the state would be projected to hit a shortfall of more than $200 million again in 2018.

Rhoades proposed eliminating a sales tax exemption for state building projects to partially offset that, a proposal that the committee will review Wednesday.

The remaining provisions of Suellentrop’s plan are similar to many parts of Donovan’s plan. It would:

▪ Raise sales tax to 6.5 percent but tax food purchases at 5.9 percent. That would raise $128 million.

▪ Raise the cigarette tax 75 cents and raise the tax on liquor from 8 percent to 10 percent for a combined $68 million

▪ Add 5 cents per gallon to the gasoline tax, generating nearly $82 million.

▪ Reduce itemized deductions by $97 million, including an elimination of the homestead and many other deductions.

▪ Offer amnesty from penalties on unpaid income taxes in hopes of drawing in an extra $30 million.

▪ Establish a fee on insurance providers expected to bring in $48 million.

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