Kansas Senate rejects bill modifying business owners’ tax exemption

TOPEKA – The Kansas Senate had just begun debate Wednesday on a nearly $500 million tax bill when Sen. Dennis Pyle plopped a trash can on his desk and invited his colleagues to smell it.

Pyle, R-Hiawatha, a conservative firebrand, argued that’s where HB 2109 belonged: in the trash can.

Pyle’s words turned out to be strangely prophetic: The Senate voted down the bill 30-1 after six hours of debate.

Sen. Les Donovan, R-Wichita, the Senate Taxation Committee chairman and the bill’s carrier, was the only lawmaker to support it.

The Legislature, in the fifth week of its wrap-up session, needs to fill a projected $400 million budget hole in fiscal 2016, which begins in July. The bill, as originally written, would have filled that hole with about $90 million left over in state coffers.

State workers could face furloughs next month if lawmakers do not act quickly.

Donovan said early in the debate that he’s no fan of tax increases.

“But I try to be a realist. ... We have to do something,” he said.

He challenged his colleagues to tell the state’s school districts that the Legislature would be cutting $200 million from their budgets, which he said was the alternative to raising taxes, because school funding takes up about half of the state’s budget.

The bill would have temporarily replaced the exemption for business owners, Gov. Sam Brownback’s signature policy, with a 1 percent tax credit for the cumulative salaries of a company’s employees. The exemption would resume after two years. Donovan called this a “reasonable compromise.”

The bill would have frozen tax rates for wage earners at 2.7 percent for the lower bracket and 4.6 percent for the upper bracket and would have eliminated all income tax exemptions except for charitable contributions, property taxes paid and mortgage interest.

Sending a message

More than an hour of the debate was devoted to an amendment brought by Sen. Michael O’Donnell, R-Wichita, that would have inserted into the bill the language from a House bill that would tax business owners at a rate of 2.7 percent.

O’Donnell said he opposed the tax on business owners but argued that the Senate should take a position on the matter before the House proceeds with the legislation.

“If this fails today, then I think the House members should be worried that they’ll be voting on something that doesn’t stand a chance,” O’Donnell said.

O’Donnell mocked Democratic members who have long criticized the business exemption, telling them this would give them a chance to tax business owners.

However, Senate Vice President Jeff King, R-Independence, pointed out that the language of O’Donnell’s amendment contradicted itself because it did not remove Donovan’s language from the underlying bill.

Senate President Susan Wagle, R-Wichita, scolded O’Donnell for trying to send messages instead of offering serious solutions to the state’s budget hole.

“If we want to send messages today, I think I’ll just bring out a 6.85 (percent) sale tax, which is what we’ll face if we don’t come out with a mix of taxes … or maybe I’ll come out with a 6.95 (sales tax), and I wonder how the senator from Sedgwick will vote on that,” Wagle said to O’Donnell, who had joined Democrats earlier in the day in voting for provisions to drop the sales tax rate.

“I don’t think this sends any messages, and I think it’s clearly a waste of time,” Wagle said.

O’Donnell defended his decision to bring the amendment and suggested that Wagle has grown out of touch with the Republican caucus on tax policy.

“The House could pass that tomorrow, and we know it won’t pass the Senate,” he said. “Why would we waste time voting on things that we know aren’t going to pass the other chamber?”

He argued that the vote took the rollback of the business exemption off the table and that it was important for the Senate to stake out a position.

“I think there’s a big gulf right now between what the House wants and the Senate wants,” he said.

Taxing business

The Legislature passed a law in 2012 that enabled the owners of limited liability corporations and S corporations to pay no taxes on their income. Republicans, who hold supermajorities in the House and Senate, have been divided on whether to put business owners back on the tax rolls as part of a budget fix.

The House Taxation Committee advanced a bill Tuesday that would do that, and a debate was expected Thursday, but Rep. Marvin Kleeb, R-Overland Park, House Taxation Committee chairman, who observed the Senate debate, said that a Thursday debate was no longer expected.

Sen. Jeff Longbine, R-Emporia, who owns a car dealership, said that as a business owner, he would prefer to pay a tax on his income rather than seeing a higher sales tax rate, arguing that a sales tax hike would hit his company’s customers and affect his company when it buys supplies.

However, Sen. Steve Abrams, R-Arkansas City, said the fact that lawmakers were even discussing raising taxes on business owners could scare business away from the state.

“It makes them very nervous,” he said.

Pyle called taxation a means of “legal plunder” and accused his colleagues of acting like thieves for even considering it.

Sen. Tom Holland, D-Baldwin City, said Donovan’s bill failed to address the state’s underlying problems by not totally eliminating the exemption for business owners and increasing taxes on middle-class Kansans to help fill the hole.

“We have tax policy driven by greed and not economic need,” Holland said.

He noted that less than 1 percent of business owners accounted for $87 million in savings from the income tax exemption, or more than 40 percent of the overall money saved.

“Where are the jobs? Where are the jobs?” he said, noting that Brownback had promised the tax policy would spur job growth. “We’re not fooling anyone.”

The Legislature has been in session for 97 days – traditionally, the session lasts 90 days or fewer – and has made little progress toward fixing the budget hole.

“I’m tired of going home and not having an answer,” Sen. Ralph Ostemeyer, R-Grinnell, said during the debate.

This story was originally published May 27, 2015 at 10:58 AM with the headline "Kansas Senate rejects bill modifying business owners’ tax exemption."