Kansas House panel advances bill to put business owners back on income tax rolls

TOPEKA – The Kansas House will debate a bill that puts Kansas business owners back on income tax rolls this week.

The House Taxation Committee voted 8-6 to advance SB 29 on Tuesday in a vote that highlighted the division with the Republican Party on tax policy.

Democrats kept their hands down during the vote, voting neither for nor against the bill, which includes a rollback of Gov. Sam Brownback’s signature policy, a tax exemption that allows some business owners to pay no tax on their income.

Under the plan, crafted by Rep. Mark Hutton, R-Wichita, business owners currently benefiting from the exemption would pay a 2.7 percent tax on their income. That’s the same rate that the lowest bracket of wage earners pays and would help raise $101 million for Fiscal 2016.

Hutton argued that it would be unfair to allow business owners to keep the exemption when “we’re asking everybody else in this state to step up and pay more.”

Lawmakers are currently staring down a shortfall of more than $400 million for Fiscal 2016, which begins July 1. Rep. Marvin Kleeb, R-Overland Park, the committee’s chairman, noted at the outset of Tuesday’s meeting that lawmakers likely need to pass a budget by this weekend or there could be consequences.

State workers could face furloughs by mid-June if the Legislature does not pass a budget before then, according to the state’s Legislative Research Department.

Changes proposed in the bill would raise about $400 million in revenue through a combination of taxes. Assuming that another bill that raises $48 million through a tax on insurance providers passes, the state would close its shortfall and have about $42 million left at the end of Fiscal 2016.

House Speaker Ray Merrick’s staff said the bill would run on the House floor either Wednesday or Thursday.

The Senate also will debate a tax plan Wednesday after canceling debate last week. The Senate’s plan replaces the business exemption with a 1 percent tax credit for the total salaries of a company’s employees.

The House plan, crafted by Hutton, would freeze state income tax rates for wage earners at 2.7 percent for the lower bracket and 4.6 percent for those in the higher bracket until 2019 rather than allow scheduled cuts to take place. Holding rates at those levels would raise $26.4 million in 2016 and almost $100 million the year after.

Hutton’s plan would also raise the sales tax on most purchases from 6.15 to 6.45 percent but drop the rate on food to 5.9 percent. Kansas is one of the only states that taxes food at the same rate as other purchases. The change in sales tax would net the state $107.5 million.

An additional 46-cent tax increase on cigarettes would bring in another $37.8 million. That would raise the total state tax on each pack of cigarettes to $1.25.

Hutton’s plan would eliminate most itemized income tax deductions except the deduction for charitable contributions, property taxes paid and mortgage interest. The value of the latter two would be reduced by 50 percent. The bill would also offer amnesty to people facing penalties for unpaid taxes in an effort to draw in more revenue.

One cloud that hangs over the head of the process is the Kansas Chamber of Commerce’s opposition to raising taxes.

The chamber has repeatedly called on lawmakers to do more to curb spending and warned against efforts to roll back the business exemption. The chamber is a major supporter of Republican candidates, spending about $600,000 in the latest election helping Republicans expand their supermajority in the House

“I didn’t come up here to represent the Kansas Chamber of Commerce,” Hutton said when asked whether he had experienced any fallout from pushing the rollback. “I represent the 105th District of Kansas and the 22,000 people who live in that district, and that’s what I’m going to do.”

Kleeb and Rep. Ron Ryckman Jr., R-Olathe, who chairs the House Appropriations Committee, met privately with the chamber’s lobbyist, Eric Stafford, on Tuesday morning.

After the meeting, Stafford offered few details but said that the legislative leaders and the chamber were not on the same page.

“We have a hard time understanding why our friends who ran on a pro-growth, limited-government platform keep attacking the business community,” Stafford said later in the day once the Hutton plan had been passed out of committee.

The chamber has strongly opposed efforts to roll back a tax exemption, which allows the owners of certain businesses, such as limited liability corporations, to pay no tax on their income. It has supported a sales tax increase as an alternative.

Ryckman didn’t share specific details about the closed-door meeting either.

“We are working with as many partners as we can to try and find a solution to the revenue situation we’re in and getting input from all stakeholders,” Ryckman said.

He stressed the urgency that lawmakers act quickly in order to avoid an impact on state services.

“We have some big decisions that are going to have to happen in a short amount of time,” Ryckman said. “We’ve got payroll to meet, tax policy to set, so we need people who are willing to govern. … The governor will have to make some decisions very soon on who’s essential, who’s not, if we don’t find a way to govern.”

Asked about the possibility that the state would need to furlough workers, the governor’s office issued a brief statement.

“We are talking with the Secretary of State, legislative staff, Department of Administration, Budget Office and others to determine the last possible date a budget can be passed before furlough notices would have to be issued,” said Eileen Hawley, the governor’s spokeswoman. “The Governor continues to work with legislators on a pro-growth strategy to balance the budget.”

Hutton’s plan could still struggle to find the 63 votes it needs to pass the House.

Democrats didn’t block it from passing out of committee, but they aren’t likely to provide votes for the plan on the floor.

“Republicans created this mess. They’ve got to fix it,” said Rep. Tom Sawyer, D-Wichita.

“I do think there are some reasonable things in this plan – it does close the business loophole, it freezes rates, so at least we’re not digging the hole bigger,” Sawyer said. He said that Democrats would discuss the plan as a caucus.

Some conservative lawmakers will likely oppose the plan. Rep. Jerry Lunn, R-Overland Park, reiterated his belief that the exemption for business owners was spurring growth and said it would be “a psychological blow” to business owners to put them back on the tax rolls.

“I’m not ready to throw in the towel,” Lunn said about his desire to keep the exemption.

However, some appear more open.

Rep. Dennis Hedke, R-Wichita, had previously crafted a plan that left the business exemption untouched, which failed on the House floor earlier this month. Hedke voiced tentative support for Hutton’s plan Tuesday, calling it “a very reasonable approach” despite his reservations about losing the business exemption.

This story was originally published May 26, 2015 at 2:29 PM with the headline "Kansas House panel advances bill to put business owners back on income tax rolls."