Gov. Sam Brownback declared the state would continue its “march to zero” on income taxes during his State of the State address on Thursday.
But the budget and tax plans he unveiled Friday showed it would not be marching so quickly.
He proposed a slowdown in income tax cuts – plus massive tax increases on tobacco and liquor – as part of his plans to fix a budget shortfall projected at $648 million for the next fiscal year.
He also wants to speed up the elimination of existing income tax deductions.
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Taxes on a pack of cigarettes would nearly triple from 79 cents a pack to $2.29 per pack. And taxes on liquor would rise to 12 percent from 8 percent.
The state’s budget problems arose after lawmakers aggressively cut personal income taxes in 2012 and 2013 at Brownback’s urging to stimulate the economy.
Brownback’s budget-balancing plan would allow a small reduction to tax rates for the lower income tax bracket in 2016 and then freeze rates until state coffers are restored.
The proposal is similar to a plan offered by Brownback’s Democratic opponent, Paul Davis, last fall and attacked by the Brownback campaign.
Under Brownback’s budget proposal, tax revenue would increase by $211 million for the fiscal year that begins next July. The budget also proposes a combined $615.5 million in budget cuts and transfers from dedicated funds. That would close the budget gap and create a cash surplus.
The proposal would divert funds for highway projects to general government programs and delay the elimination of a long-term funding gap in the pension system for teachers and government workers. Overall state aid for public schools would remain flat through June 2017, with higher spending on teacher pensions.
Liquor, tobacco tax hikes
The tax increases on liquor and cigarettes will not be very popular and will have trouble passing, predicted Rep. Pete DeGraaf, R-Mulvane, who sits on the budget committee. He said lawmakers would consider other options to find the dollars.
Democrats pointed out that consumption taxes disproportionately affect working-class people.
“It’s a hit on anybody who smokes. A hit on anybody who drinks. But these kind of consumption taxes always hit lower income people harder,” said Sen. Laura Kelly, D-Topeka, the ranking minority member on the Senate budget committee. “You’d put them in the regressive tax category.”
Revenue Secretary Nick Jordan contended that “income taxes are on people’s productivity and hard work,” but with “consumption taxes you at least have freedom to decide how much you’re going to spend and where you’re going to spend.”
“Totally in line with his overall philosophy since he was first elected,” he added.
Blake Wiseman said he used to smoke more often but has started chewing tobacco and smoking less. The price and health of his lungs were two big reasons he cut back, he said.
Wiseman says he usually buys a can of chew for about $2, but if the price goes up, he may have to quit altogether.
The proposed cigarette increase would mean that if a person smokes a pack a day, the state would collect an extra $547.50 per year.
George Stevens, majority owner of Wichita Tobacco and Candy Co., said customers might just head to places where taxes on cigarettes are lower. That concern was echoed by Sen. Jeff Melcher, R-Leawood, who said many residents in his district already buy cigarettes in Missouri.
Some consumers don’t have that option, said Nick Gardinier, manager at Davis Liquor at 13th and Waco in Wichita.
“A lot of our customers walk here,” he said. “A lot of them don’t have cars.”
“I think it’s wrong,” he said. “I think they should be getting their money from other sources instead of giving all the tax breaks that they’ve been doing to like Koch and big business, and now they’re coming back on the little people.”
A course too bold?
The slowdown in income tax cuts might come as a surprise to Kansans who listened to Brownback promise to “continue our march to zero income taxes” Thursday night.
“There may be some who consider this course too bold. Well, I’m the sort of guy who would have sent Alex Gordon from third base,” the governor said in reference to a pivotal play in the last inning of last year’s World Series when the Kansas City Royals star ended up stranded on third base instead of running to home plate, which could have resulted in the tying run.
Brownback’s original tax plan eliminated income taxes for owners of certain businesses, such as limited liability corporations. His new proposal would keep that tax exemption.
But he would soften additional income tax cuts for individuals scheduled for 2016 and pause tax cuts scheduled for 2017 and 2018.
Income tax rates dropped Jan. 1 to 2.7 percent for the lower bracket and 4.6 percent for the upper bracket. The rate for the lower bracket is scheduled to fall to 2.4 percent in 2016 under current law; it would fall to 2.66 percent under Brownback’s new proposal.
The governor also wants 50 percent reductions in existing income tax deductions – including for property taxes and for home mortgage interest – to occur this year instead of in 2017. That would generate an estimated $72.1 million over the next two fiscal years.
His plan would establish a tax reduction fund that would put money toward tax relief if state revenue exceeds the previous year by 103 percent. And it would create a budget stabilization fund in the event that revenue misses that mark but reaches 102 percent. That money would become a rainy day fund for the state to use in future budget crises.
The Davis plan
Brownback’s plan on income taxes differs only slightly from the one put forward by Davis, which would have paused rates at 2015 levels until state revenue was restored enough to fund base education aid per pupil at pre-recession levels.
Brownback’s campaign spokesman John Milburn called the Davis plan “appalling” in August.
“The effect of this so-called economic plan would be to make it harder for struggling Kansans to make ends meet and provide for their families. Kansans should be outraged,” Milburn said in a campaign release.
Kelly, the Democratic senator from Topeka, quipped Friday that she “appreciated that they used Paul Davis’ solution … he’s probably laughing.”
Kelly said the administration’s proposal proves that the state has a serious revenue problem rather than just a spending problem as many Republicans have claimed.
But administration officials aggressively pushed back against the notion that Brownback’s plan was similar to Davis’ plan.
Budget director Shawn Sullivan took to Twitter to dispute the idea. And the Department of Revenue sent out a release lauding the governor’s plan as continuing tax relief for Kansans.
Jordan said Brownback’s plan was “not even close” to the Davis plan.
“It doesn’t pause them. It depends on growth. The bottom rate still goes down next year,” he said.
A married couple making $30,000 a year would save an additional $6.60 a year or 55 cents a month under the softer reduction Brownback now proposes for the next fiscal year.
Some Republican lawmakers were willing to admit the resemblance.
“There were some similarities to what Paul Davis talked about. This is not a literal freeze,” said Sen. Michael O’Donnell, R-Wichita, a member of the Senate budget committee. “So this is more subtle.”
Sen. Dan Kerschen, R-Garden Plain, another member of the committee, said he supported the idea and didn’t care who had it first.
“I don’t know whose plan (it is). I like the proposal at the end of the day. It’s a good start. It’s what needed to happen,” Kerschen said.
Dave Trabert, president of the Kansas Policy Institute, a conservative think tank in Wichita, said he thought lawmakers should still look for more savings in the budget before making any changes to the income tax plan.
“We don’t need to do the tinkering on the tax plan that’s being proposed,” Trabert said.
Contributing: Anthony Williams and Dion Lefler of The Eagle and Associated Press