Republicans call for look at key tax exemption amid budget shortfall

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TOPEKA — As lawmakers grapple with the full scope of the state’s budget shortfall, some lawmakers — including the Senate’s top Republican — say a key part of Gov. Sam Brownback’s tax policy needs to be re-examined.

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TOPEKA — As lawmakers grapple with the full scope of the state’s budget shortfall, some lawmakers — including the Senate’s top Republican — say a key part of Gov. Sam Brownback’s tax policy needs to be re-examined.

Senate President Susan Wagle, R-Wichita, said lawmakers will review the state’s tax exemption on pass-through business income. The exemption spares owners of limited liability and S corporations from paying taxes on their business income.

When the exemption was initially passed in 2012, officials estimated less than 200,000 individuals would use it. In reality, though, more than 300,000 people are now claiming the exemption, costing the state millions in revenue as lawmakers look for ways to plug an $800 million budget hole for the next fiscal year, which begins July 1.

“Clearly, we’re going to take a look at it,” Wagle said. “There’s several legislators that have different approaches to addressing our situation.”

Gov. Sam Brownback has proposed $211 million in tax increases, largely coming from hikes in cigarette and liquor taxes. Multiple lawmakers believe the governor’s proposals as written are likely going nowhere.

“As far as I’m concerned, those are dead on arrival. I might support a small increase,” Rep. Mark Hutton, R-Wichita, said, adding that he wouldn’t support anything near the level of what Brownback has put forward.

Rep. Don Hineman, R-Dighton, also sees little support for the tax hikes, though he hesitates to close the door completely on any changes.

“There hasn’t been a lot of support expressed for cigarette and tobacco taxes to date. Still wouldn’t say there’s no possibility of a tax increase on either one of them,” Hineman said.

While remaining cool on cigarette and liquor tax hikes, both Hutton and Hineman want to take a look at the pass-through exemptions.

For Hutton, the pass-through exemption is an issue of fairness. A large number of those who claim the exemption received a fairly insignificant benefit from it, he said. But with so many people claiming the exemption, the money begins to add up.

“It’s not producing what it promised to do, and I think it’s a structural problem. I’m not saying eliminate it, but I’m saying take a hard look at it and tweak it for fairness and equity,” Hutton said.

The key isn’t to generate new revenue to fuel additional government spending, Hutton said, but to have an equitable system that rewards people doing work in the state.

Wagle echoed that sentiment. Tax policy should be reliable, sustainable and equitable, she said. When the pass-through exemptions were implemented, the goal was to free up business profit to be reinvested in ways that strengthen the economy.

Many businesses have benefited from the exemptions, Wagle said, but lawmakers also see them as a fairness issue. Sen. Jim Denning, R-Overland Park, has already called for fixing what he views as a “loophole” in the LLC exemption.

“One of the impacts it has created is what I call horizontal inequity,” Wagle said.

By horizontal inequity, Wagle said she means the exemptions have created situations where a business owner may not pay tax on income, but an employee making less would.

Senate Minority Leader Anthony Hensley, D-Topeka, said that whatever tax plan Republicans come up with will likely be regressive. Ideas to repeal the sales tax exemption on utility bills and reducing the earned income tax credit will place a hardship on low- to moderate-income individuals, he said.

Hensley indicated lawmakers face obstacles in opening discussion of the pass-through exemptions.

“I believe there are some Republicans that would support re-examining that, but the difficulty with that is whether the governor would support that,” Hensley said.

Brownback spokeswoman Eileen Hawley, asked via email whether the governor would oppose altering the pass-through exemptions and would veto legislation making changes, replied: “The Governor looks forward to working with legislators to build a structurally balanced budget.”

Critics of the governor and the state’s tax policy have often hit on what they see as the structural imbalance that now exists in the budget. Former budget director Duane Goossen, writing on the Kansas Center for Economic Growth’s website, said without the 2012 and 2013 changes to the tax policy, Kansas would have enough income to fund the budget under consideration. Instead, the state has used temporary measures, such as increased transfers from the highway fund, to make ends meet.

The goal is to create a structurally balanced budget, Wagle said. The process to get there may be rocky.

“It takes a lot of compromise and a lot of negotiations and everybody has a very different perspective of what the problem is and how to correct it,” Wagle said.