TOPEKA – Kansas lawmakers are considering eliminating a sales tax exemption for school and other government construction projects as a way to help fill the state’s budget hole.
HB 2435, which was reviewed by the House Taxation Committee on Wednesday, would repeal a sales tax exemption for public building projects. That would bring in nearly $151 million in the 2016 fiscal year, which starts in July, to go toward filling a shortfall of more than $400 million.
About $85 million of that would come from local governments that would lose the exemption. Almost $28 million would come from schools.
Larry Baer, legal counsel for the Kansas League of Municipalities, warned that this would force local governments to scale back projects or raise property taxes to help cover the increased cost. He called it a veiled property tax increase.
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Tom Krebs, lobbyist for the Kansas Association of School Boards, voiced a similar concern.
“This seems to be a shift, bottom line, moving state taxes to the local level,” he said, contending that the bill would have a negative impact on school districts.
Nathan Eberline, spokesman for the Kansas Association of Counties, said repealing the exemption would undercut local governments’ abilities to maintain public facilities.
Hospitals also benefit from the exemption and would lose nearly $16 million. The Kansas Hospital Association warned that would hurt rural hospitals and result in higher costs for patients.
The remaining $23 million would come from state projects. Rep. Mark Hutton, R-Wichita, noted that building projects are typically paid for through bonds and said the state would be “borrowing money so we can tax ourselves.”
Rep. Steve Johnson, R-Assaria, called the bill “a perpetual motion machine” and worried that it would result in property tax increases.
Rep. Don Hineman, R-Dighton, noted that the Department of Revenue’s estimates do not take into account the impact this bill would have on school and state projects and said the savings would be less than the $151 million estimate.
“The idea that we’re gaining revenue on one side but neglecting to count increased construction costs … that’s deceptive,” Hineman said.
The lone organization backing the proposal is Americans for Prosperity, which has ties to Wichita-based Koch Industries.
Roger Woods, Americans for Prosperity’s deputy state director, testified that 23 states have no exemption for public building projects. He said schools and local governments could make up for the cost by finding efficiencies in their budgets.
Rep. Marc Rhoades, R-Newton, said he had not drafted the bill but had pushed for it to get a hearing. He floated the idea of eliminating the exemption Tuesday during a hearing on a broader tax package as an alternative to rolling back a tax exemption for business owners.
He said he and many other conservatives did not want to touch the business exemption and contended that until conservative lawmakers coalesce behind a plan, the Legislature would make little progress toward fixing the deficit.
“I don’t think anybody else is going to help us. I don’t think moderate Republicans are going to help us, I don’t think the Democrats are going to help us,” he said.
Eliminating the public building exemption is an option, he said, adding that perhaps lawmakers could eliminate only the state’s exemption and leave schools and local governments untouched.
State senators are expected to vote on a different tax plan Thursday, according to Senate Majority Leader Terry Bruce, R-Hutchinson.
HB 2109 would eliminate the business exemption that allows owners of certain businesses, such as limited liability corporations, to pay no income taxes. It would replace that exemption with a 1 percent tax credit on a company’s payroll. Business owners would pay tax on their income but would get a break based on the total salaries of their employees.
Individual income tax rates would be frozen at their current levels of 2.7 percent for the lower bracket and 4.6 percent for the upper bracket.
The Senate plan also would raise the sales tax from 6.15 percent to 6.5 percent except on food. The tax on food purchases would fall to 6 percent. The tax on gasoline would increase by 5 cents per gallon and the tax on a pack of cigarettes would increase by 50 cents.
The Senate plan would generate about $495 million in additional tax revenue to leave the state with a projected ending balance of $89.5 million in 2016.