Heed voices calling for tax fairness

Last week some unexpected voices argued for a do-over of the 2012 state income tax cuts – those of business owners and a free market-oriented think tank. They should not be silenced by Gov. Sam Brownback’s threat to veto anything that would disturb his signature tax reform.

The testimony came up in hearings on House Bill 2444, the proposal sponsored by Rep. Mark Hutton, R-Wichita, to roll back the part of the 2012 reform that now allows more than 300,000 owners of limited liability corporations and other categories of businesses to pay no state income tax.

Under his proposal, the $261 million of new revenue would enable a cut in the statewide sales tax on food from 6.5 percent to about 2.9 percent – a worthy idea meant to reduce Kansas’ highest-in-the-nation taxation of groceries. An alternative, Senate Bill 508, would newly tax 70 percent of the income earned by an LLC partner as wages, leaving 30 percent tax-free as nonwages, with the revenue going to help the struggling state budget.

Hutton counts himself among the numerous business owners now exempted from state income tax who are “uneasy with this arrangement,” he said, “and believe that is kind of a slight to our employees.”

At Tuesday’s hearing, Troy Ritchie, owner of Wichita’s Ritchie Construction and an employer of 750 people, told lawmakers he has never hired someone because of a tax break.

Olathe business owner LeEtta Felter testified that “with recurring revenue shortfalls creating a fiscal crisis for Kansas, we must close the loophole.”

Salina business owner Trace Walker said: “I’m concerned about our roads and bridges, our reservoirs, our aquifer and our law enforcement.”

Then there was the startling testimony of Scott Drenkard, economist and director of state projects at the Tax Foundation in Washington, D.C., who was not endorsing specific legislation.

His bullet points were that Kansas’ pass-through exemption has proved costly and forced other tax increases, “encourages tax avoidance without generating desired growth” and “is doing damage to the state tax reform conversation nationally.” He attributed the state’s ongoing “revenue underperformance” to the 2012 tax carve-out for business owners.

Drenkard also said: “Tax reform is about broadening tax bases and lowering tax rates. This state has lowered tax rates, but the pass-through exemption significantly narrows tax bases, and the wheels are coming off because of it.”

Brownback and other leading Statehouse Republicans need to listen to such reason – and realize that the remedy for the state’s fiscal condition will come from restoring tax fairness.

This story was originally published March 19, 2016 at 7:05 PM with the headline "Heed voices calling for tax fairness."