Politics & Government

Kansas Senate approves tax bill, sends it to House

Kansas state Sen. Greg Smith, center, R-Overland Park, confers with Sens. Mary Pilcher-Cook, R-Shawnee, and Ty Masterson, R-Andover, during the chamber's debate on a plan for raising taxes to close a budget shortfall, Sunday, June 7, 2015, at the Statehouse in Topeka, Kan. The plan raises sales and cigarette taxes. (AP Photo/John Hanna)
Kansas state Sen. Greg Smith, center, R-Overland Park, confers with Sens. Mary Pilcher-Cook, R-Shawnee, and Ty Masterson, R-Andover, during the chamber's debate on a plan for raising taxes to close a budget shortfall, Sunday, June 7, 2015, at the Statehouse in Topeka, Kan. The plan raises sales and cigarette taxes. (AP Photo/John Hanna) AP

TOPEKA – On a record-setting 108th day in the Kansas legislative session, Senate Republicans passed a tax bill, the first crack in the gridlock that has gripped the Capitol as lawmakers struggle to close a budget hole.

The bill protects the zero income tax rate for pass-through business owners while raising the general sales tax from 6.15 percent to 6.55 percent on July 1. A year later, the tax on food would drop to 4.95 percent.

It also would increase the cigarette tax by 50 cents a pack and end most tax deductions. It sets a 2019 expiration date for most sales and property tax exemptions.

The passage capped 14 straight days of work for the Senate. It followed the rejection of several tax plans by both chambers and a scramble on Saturday to pass a bill averting furloughs for state employees.

The Senate then quickly voted out a budget bill that had already been approved by the House.

House members still must consider the tax plan. They are due back at 2 p.m. Monday after taking Sunday off.

If the House concurs with the Senate tax plan, the session could end Monday.

But Sen. Les Donovan, the Senate tax committee chairman, said he doesn’t think it will be that easy. House members haven’t passed a tax bill, but there’s been significant support for raising a tax on businesses that now pay nothing.

“I wish I knew this was over, but I don’t think it is,” said Donovan, R-Wichita.

The Senate passed the tax plan by the tightest margin possible.

The initial vote was stuck at 20, one vote short of the number needed for passage. Then Sen. Julia Lynn, R-Olathe, returned to the chamber and cast the decisive vote to give it 21.

A moment later, Sen. Michael O’Donnell, R-Wichita, changed his vote from “yes” to “pass” then back to “yes” after Sen. Jeff King, R-Independence, who chaired the meeting, told him he had to either vote or request permission to pass.

Donovan asked the Senate to pass the bill “with a strong vote, strong enough to send a message to the House that says ‘This is the answer. Finish our work here.’ ”

Sen. Tom Holland, D-Baldwin City, later responded: “I would be more concerned about the message we’re sending to the Kansas people.”

Ending exemptions

The new wrinkle in Sunday’s bill is automatic elimination at the end of 2019 of numerous sales and property tax exemptions.

The full list was not available Sunday. Republican lawmakers said it would include nearly all exemptions except those for religious organizations, agriculture, business-to-business commerce and some health organizations.

A Republican-dominated commission would be appointed to decide which, if any, other exemptions should be added back.

Democrats expressed concerns that that provision would levy sales taxes on utilities and gasoline.

Minority Leader Anthony Hensley, D-Topeka, asked four times why the provision would protect agriculture utilities but not residential utilities.

Later, Majority Leader Terry Bruce, R-Hutchinson, said he had reviewed tax laws and that utilities and gas would not be at risk for additional sales taxes beyond the taxes Kansans already pay on those items.

The bill also protects the zero income tax rate now enjoyed by owners of limited-liability companies, sole proprietorships, farms and corporations organized under Subchapter S of the federal tax code.

Those are called “pass-through” businesses because the companies aren’t taxed and owners theoretically pay taxes on their personal returns.

Sunday’s bill would tax only guaranteed payments to pass-through business owners. Critics say they can easily circumvent that by changing the way they pay themselves.

Gov. Sam Brownback proposed taxing guaranteed payments. He said again Sunday that he would veto a tax plan that went beyond that to raise the zero tax rate on pass-through businesses, the centerpiece of his 2012 tax plan.

Income tax rates for wage-earning workers would be frozen at the current level through 2017 and would decline slightly for low-income workers in 2018.

The general sales tax rate would rise by four-tenths of a cent; the tax on food would drop by 1.6 cents a year later.

“It’s the lowest rate (on food) we’ve looked at all session,” Donovan said.

The food sales tax rebate for poor families, the elderly and people with disabilities would be eliminated.

In addition to the 5--cent-a-pack cigarette tax, the state would tax the liquids used in electronic “e-cigarettes” at 20 cents per milliliter starting in July 2016.

School choice

The proposal also contains a change in a $10 million school-choice program that gives 70 percent tax credits on corporate donations to private-school scholarships. The change would allow payments to private schools for students who are already attending them and whose parents pay their way through tithes to their church.

Another provision would require local governments to hold an election to raise property taxes by more than the rate of inflation.

Cities, including Wichita and the unified government of Kansas City and Wyandotte County, have said that proposal is based on faulty math.

Those cities said most property tax growth is from new construction, which has no relationship to the inflation rate. They also said it would be chaotic for local governments to try to hold elections with existing mandatory deadlines on budgeting and tax notifications.

Budget passed

Minutes after passing the tax plan, the Senate voted 23-11 to approve the budget after a 20-minute, largely perfunctory debate in which Democrats raised a few objections related to funding of universities.

Sen. Laura Kelly, D-Topeka, complained about the split of state scholarship money, traditionally 50-50 between public and private colleges.

This year’s budget changes the split to 60 percent to private schools and 40 percent to public ones, although private colleges have only 20 percent of the state’s students.

She also pointed out that the budget balances because of several one-time maneuvers and said the state will face a deficit again next year.

The state originally faced an $800 million deficit this year, in large part because of 2012 income tax cuts. Half of that was closed with fund transfers and other budget moves. Sunday’s tax bill would fill the rest of the gap.

The budget outlines $6.37 billion in spending in state general funds and $15.4 billion when all funds, including designated fees and federal grants, are taken into account.

Monday session

Senators plan to go back into session at 4 p.m. Monday, two hours after the House, to either shut the session down or send the tax bill back to a House-Senate tax conference committee for another try.

“I know the governor’s definitely behind this, so maybe we’ll see if that helps,” Donovan said.

Donovan said he met briefly with Brownback before the governor left for the birth of his first grandchild.

Hensley said a bill that passed by a larger margin in the Senate would have a better chance in the House.

“This sends a message to the House that we barely passed on that plan,” he said.

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

What’s in the tax bill

Here are the major provisions of the tax plan the Senate passed Sunday. It generates about $471 million, leaving the state with an ending balance of about $75 million.

Financial provisions

▪ Tax guaranteed payments to owners of pass-through businesses who currently pay no state income tax; $23.7 million

▪ Raise sales tax from 6.15 percent to 6.55 percent; $187.7 million. Sales tax on food to drop to 4.95 percent in July 2016.

▪ Eliminate food sales tax credit for poor families, seniors and people with disabilities; $15 million

▪ Increase cigarette tax by 50 cents a pack to $1.29; $40.4 million

▪ Eliminate most itemized deductions, reduce taxpayers’ deductions for mortgage interest and property taxes paid; $97 million

▪ Postpone scheduled decrease in income tax rates on wage earnings; hold rates at 2.7 percent in low bracket and 4.6 in upper bracket; $26.4 million.

▪ Provide amnesty on penalties to people who agree to pay back taxes owed; $30 million

▪ Require Social Security number for tax credits; $15 million

▪ A separate bill increased the “privilege fee” tax on managed-care health plans; $47.8 million

Policy provisions

▪ Sets Dec. 31, 2019, as an automatic expiration date for virtually all sales and property tax exemptions, except those for churches, agriculture, business-to-business transactions and select health-care-related purchases.

▪ Establishes a tax study commission to determine whether any exemptions eliminated by the automatic expiration should be retained.

▪ Requires cities and counties to hold a public election to raise property tax income by more than the rate of inflation.

▪ Allows private schools to directly receive money from a tax-credit funded scholarship program, to accommodate students whose parents pay for schooling by tithing to their church.

▪ Starting in 2019, requires automatic tax cuts if state income grows more than 3 percent in a year, adjusted for required spending on pensions and Medicaid.

Related stories from Wichita Eagle