TOPEKA — The Kansas Senate geared up for a fiery tax policy debate today on a proposal endorsed by Democrats that would retroactively repeal an income tax exemption held by 330,000 business owners and raise individual income tax rates to close an immediate budget shortfall of more than $300 million.
The full Senate’s conversation about Senate Bill 188 — designed to roll back tax policies cherished by Gov. Sam Brownback — is expected to last hours longer than the 10-minute session Wednesday in the House, where a similar but less aggressive strategy for raising revenue was advanced to final action today.
The Senate had called off floor debate last week on legislation that would have cut K-12 spending and elevated taxes to close the gap.
“We’ve had a lot of discussion,” said Senate President Susan Wagle, R-Wichita. “I would have liked to cut. The public clearly said … fix the budget.”
“This is the start to an honest discussion in a long process to structurally fix our budget,” said Sen. Tom Holland, D-Baldwin City.
A key feature of the budget-balancing package put together by Democrats is the repeal, retroactive to Jan. 1, 2017, of the income tax exemption granted to farmers, dentists and other owners of limited liability corporations and other business structures. That business-owner tax was signed in 2012 by Brownback, who promised an economic renaissance in post-recession Kansas.
The Democrats’ bill would restore all standard and itemized deductions to 2012 law, delete from state law automatic personal income tax rate cuts and retain an income tax exemption for low-income earners.
In addition, the state would reimpose a third individual income tax bracket as was the case in 2012. The new rates would be 2.7 percent, 4.6 percent and 6.45 percent. The bottom two rates would be unchanged from present law, and the new higher rate would apply to married joint filers with at least $70,000 in annual taxable income.
Senate Minority Leader Anthony Hensley, D-Topeka, said the bill would raise $1.2 billion in two years. The revenue shortfall in the current fiscal year, which ends in June, stands at approximately $310 million. The projected shortfall in tax revenue in the upcoming fiscal year has been pegged at $500 million.
“When you do that 6.45 percent and repeal the LLC, you pick up $700 million in the first year,” said Hensley, who was uncertain whether the bill had enough support to pass the Republican-led Senate. “I don’t know. We’re getting a lot of help from moderate Republicans on this.”
Hensley said advantages of the Democrats’ bill were it allowed regular payments by the state to Kansas Public Employees Retirement System, protected future payments to Kansas from the national tobacco settlement and created a positive ending balance of $40 million this fiscal year and $138 million next fiscal year.
Brownback said he would refuse to sign the House’s tax bill, but Wagle said there was a possibility the Senate would debate that measure Friday if it cleared the House as expected. The House’s bill was advanced 83-39 to final action.
In January, Brownback proposed a plan that would increase the state’s alcohol and tobacco taxes, expand a business filing fee, drain more money from the state highway fund, liquidate a long-term investment fund of at least $300 million and sell future proceeds of tobacco payments now dedicated to programs for children.
His strategy would preserve the income tax exemption for LLCs and other businesses that served as a rallying point in the 2016 elections. Moderate Republicans and Democrats gained seats in the Legislature in part because of growing public disenchantment with the LLC exemption. It costs the state about $200 million annually in revenue and has been characterized by opponents as fundamentally unfair and not the job creator promised by the governor.