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Brownback signs income tax cuts

From staff and wire reports

TOPEKA -- Kansas Gov. Sam Brownback signed massive income tax cuts into law Tuesday, expressing confidence they would boost the economy and not create future budget problems or shift the state's tax burden to the poor.

"Today's legislation will create tens of thousands of new jobs and help make Kansas the best place in America to start and grow a small business," Brownback said during a Statehouse ceremony. "Now is the time to grow our economy, not state government, and that's what this tax cut will do."

Not everyone in the state agrees with that assessment.

The new law will cut individual income tax rates for 2013 and eliminate income taxes for the owners of 191,000 businesses. Coupled with a sales tax reduction already scheduled for July 2013, the income tax cuts would provide $231 million in tax relief for the fiscal year beginning July 1. That annual figure would grow to $934 million after six years.

Democrats and many moderate Republicans -- who were absent from the signing ceremony -- worry the cuts will create enormous budget problems and force the state to slash spending on public schools, social services, public safety and other programs.

Deficit estimates vary, but there have been suggestions the red ink could grow to $2.5 billion by 2017.

"I think it is going to leave a decent size hole in the state budget," said Kansas State University political science professor Joe Aistrup.

He's especially concerned about the effect the bill will have on smaller, rural communities, where mill levies on property could rise -- in some cases dramatically so. It essentially could halt the construction of any new facilities simply because of how high property taxes might go.

"For rural communities," he said, "this is bad news for economic development."

Business owners, conservative legislators and officials in Brownback's administration, meanwhile, flanked the governor as he signed the bill. One onlooker, Patti Bossert, the president of both a Topeka staffing agency and a business recruiting firm, said she expects to hire two new full-time employees and be searching for dozens of new, temporary jobs to fill.

"I, of course, see an immediate change in the way small business owners feel about investing money back into their company," said Bossert, who also serves on a council advising Brownback on the economy.

Fears about the cuts are based on a report from the Legislature's research staff that forecasts a budget shortfall by July 2014 that, if left unchecked, would grow to nearly $2.5 billion in four years.

Shannon Cotsoradis, president and CEO of the advocacy group Kansas Action for Children, predicted "devastating consequences." House Minority Leader Paul Davis, a Lawrence Democrat, criticized Brownback for "recklessness" and for converting a healthy budget surplus to a huge shortfall in six years.

"There is no feasible way that private-sector growth can accommodate the price tag of this tax cut," Davis said in a statement.

The new law will decrease rates for all individual income taxpayers, dropping the top rate to 4.9 percent from 6.45 percent for 2013. The standard deductions claimed by heads of households and married couples filing jointly also will increase.

Those changes would be offset by eliminating numerous tax deductions, credits and other breaks, including a rebate poor families now can claim for the sales tax they pay on groceries. However, legislators rejected a proposal from the governor to eliminate a special tax credit for poor workers that often results in them receiving a payment from the state.

The business tax break targets the owners of partnerships, sole proprietorships and other small companies, allowing them to escape taxes on earnings they have to report as individual income tax filers.

Many critics believe some large companies will change their legal structures to take advantage of the change.

In a March report, the Washington-based Institute on Taxation and Economic Policy said the tax legislation would result, on average, in a small tax increase for Kansas residents earning less than $20,000 a year, while people earning more than $400,000 would receive the biggest percentage tax cut.

Matthew Gardner, the group's executive director, said states generally favor wealthy residents over poor ones in tax policy, but Kansas has been "typical" rather than "extreme." He said in eliminating the food sales tax rebate, Kansas joins only Alabama and Mississippi in taxing groceries but not providing offsetting relief to poor families.

The changes signed into law by Brownback, Gardner said, "will make the state more of an outlier."

Figures from the state Department of Revenue for the effects of the income tax changes generally track with the institute's numbers, but administration officials strongly dispute the group's analysis. Brownback called it "wholly unfounded."

The Department of Revenue projects the coming sales tax decrease -- which the institute didn't consider a cut because it already was scheduled -- will more than offset any income tax increases for poor families.

The sales tax will decline to 5.7 percent from 6.3 percent in July 2013. Lawmakers promised the reduction two years ago before Brownback took office when they boosted the rate to close a budget shortfall.

Brownback said the state will help poor families the most by creating new jobs. Derrick Sontag, state director for the anti-tax, small-government group Americans for Prosperity, said the tax cuts are designed to do just that.

"We're excited about this -- and confident it's going to work," said Sontag, who participated in the ceremony and is married to Brownback's communications director.