TOPEKA – Seeking to break a logjam that has paralyzed the Kansas Legislature, Gov. Sam Brownback offered a plan Saturday to increase sales taxes while eliminating income taxes for the lowest-income taxpayers.
Brownback said the plan would close the current $400 million budget deficit and leave a reserve of about $75 million for 2016. The announcement came on the 100th day of the legislative session – 10 more days than budgeted for.
“We need to continue our drive off taxes on productivity and onto consumption-based taxes,” he said.
The plan would exempt 388,000 low-income Kansans from income taxes by raising the amount a person can earn before having to pay the tax, he said.
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A married couple earning $24,500, a single parent earning $17,250 or a single person earning $10,250 would pay no income taxes under the governor’s plan.
That benefit would be offset at least in part by an increase in the state sales tax from the current 6.15 percent to 6.65 percent.
Brownback said his office hadn’t determined whether low-income Kansans would end up paying more taxes overall because of the increased sales tax. Unlike many plans that have floated around the Legislature, his plan does not cut the tax rate on food.
Kansas is one of only a few states that tax food at the same rate as other products.
“I like that proposal,” Brownback said about the suggested food tax cut. “But I think it would be a stronger way to go to take that lump of resources and use it to get people off the income tax who are low income.”
Brownback’s proposed low-income tax break would save people who qualify an average of $49 a year.
Lawmakers from both parties raised concerns that the impact of the sales tax increase would outweigh the benefit of the income tax cut.
Sen. Michael O’Donnell, R-Wichita, said in a GOP caucus meeting that he was worried that the tax on food alone would surpass $49 for most low-wage workers in a year even if it looked good on paper to cut their income tax.
If the average beneficiary spent $200 on sales taxable items each week, he or she would end up paying $52 in additional sales tax over the course of a year – or $3 more than Brownback’s income tax exemption would save.
“We can put all the lipstick on the pig we want. ... It’s a regressive tax that hits working poor people much, much harder,” said Rep. Jim Ward, D-Wichita. “I’m giving you a penny, but I’m taking a dollar in the other taxes.
“I think he will spend a lot of time talking about the amount of people it impacts, not the amount of money,” he said.
The tax break for the 388,000 low-wage earners comes out to about $19 million total.
By comparison, a 2012 tax break that allows 333,000 business owners to pay no income taxes is worth more than $200 million.
Not just small businesses
Brownback’s new plan pulls back some of the business tax break, his signature policy that eliminated income taxes for owners of limited liability companies, farms, sole proprietorships and corporations organized under subchapter S of the federal tax code. Those are known as “pass-through” or “flow-through” entities, because instead of collecting tax from a business, the federal government taxes the owner’s income.
Under Brownback’s new plan, guaranteed payments to partners of LLCs would be considered taxable income. That would bring in about $23 million.
But Sen. Jim Denning, R-Overland Park, said it would take most LLC owners about 20 seconds to figure out how to dodge that by simply stopping guaranteed payments.
And although Brownback consistently refers to the break on flow-through income as “exempting small businesses from income taxes,” his pitchman to the Republican caucuses, Richard Carlson, told lawmakers size doesn’t matter.
“The ‘small-business’ term is sort of a misnomer,” said Carlson, a former House tax committee chairman who now is the Department of Revenue liaison to the Legislature. “Any type of company, no matter what the size, would qualify” as long as it is organized as a flow-through business.
Brownback’s plan eliminates all income tax deductions except for the ones for charitable contributions, mortgage interest and property taxes paid. Mortgage and property tax exemptions would be reduced to 50 percent.
The governor also proposed raising the cigarette tax by 50 cents a pack.
‘Get what they ask for’
Brownback offered his plan after several global tax bills were considered and rejected by lawmakers. Neither chamber has been able to agree on a tax plan, but they have placed a bill in a conference committee, creating a shell that could be used to carry the governor’s plan to a floor vote.
Sen. Les Donovan, R-Wichita, who as Senate Taxation Committee chairman has had the unenviable task of pushing for a tax plan, said he hoped the governor’s plan would gain traction and bring an end to the session.
“He is the governor. I’ve been here 23 years, and it’s been my experience over those 23 years that governors tend to get what they ask for,” he said.
Sen. Laura Kelly, D-Topeka, said she was disappointed that the plan relied primarily on consumption taxes. The sales tax hike and the cigarette tax increase represent a combined $275 million.
“I think the thing that bothers me the most on this is we continue have the tax structure in this state which is just blatantly unfair,” she said, referring to the business income exemption.
However, some Republicans applauded the governor’s proposal to take low-income workers off the income tax rolls as a way to create a fairer tax system.
“Absolutely. Absolutely. Absolutely,” Rep. Gene Suellentrop, R-Wichita, said when asked whether the governor’s proposal had addressed concerns about fairness.
“We’ve got to take more people off the tax rolls,” he said.
Lawmakers have faced pressure from the Kansas Chamber of Commerce and other business interest groups to preserve the 2012 tax cuts. Mike O’Neal, the former speaker of the Kansas House and president of the chamber, said his organization doesn’t support any tax increases but called the governor’s plan a step in the right direction.
Republicans have been fiercely divided on tax policy this session.
Rep. Jerry Lunn, R-Overland Park, who has been an outspoken opponent of raising taxes, said he could support the governor’s plan.
“I could very easily vote for that right now. I think it raises many of the concerns that people have had. I’m a little bit leery of raising the sales tax that high, but I think it’s a fair way to do that,” Lunn said.
Sen. Greg Smith, R-Overland Park, was less enthusiastic.
“We’re raising sales tax without getting rid of exemptions to broaden the base. You broaden the base, you don’t even need to raise the tax,” Smith said.
Brownback has faced criticism from within his own party for not more aggressively pursuing budget cuts as part of a solution. During a Senate GOP caucus Friday evening, several Republican senators accused the governor of failing to lead on that front.
Brownback pushed back against that notion Saturday.
“I don’t think that’s accurate,” he said.
“What you’ve got to do is make sure your core functions of government are funded and funded well. … Now, there may be others who say you’ve got to cut further. I think those would be very hard to get through the Legislature at the end of the day,” he said. “And I’m trying to figure out the way on through.”
The Senate will hold a debate on taxes Sunday afternoon. A wide swath of proposals are expected to come to the floor as amendments. For example, Sen. Steve Abrams, R-Arkansas City, would like to close sales tax exemptions for some nonprofits.
Senate Vice President Jeff King, R-Independence, has a proposal to put Kansas business owners back on income tax rolls. King’s plan would tax about 70 percent of an LLC owner’s income and leave 30 percent untaxed if they were active participants in the business, such as an attorney serving as a partner in a law firm. Passive investors would still have 100 percent of their income exempt.
His proposal is meant to distinguish between wage and nonwage income.
“Back in the ’50s, we actually had a wage and nonwage breakdown in the federal code that was 70-30, so there’s some precedent for it,” King said.
King and others say the 2012 bill was meant to exempt only business owners’ nonwage income from taxes, but it wound up exempting their wages also because Kansas law does not make a clear distinction.
“I would maintain that this just does what we said we were going to do in 2012,” King said.