TOPEKA — The House rejected a repeal of business tax breaks Friday as the Legislature appeared no closer to taking action to close the state’s $228 million budget shortfall.
A collection of conservative Republicans, moderate Republicans and Democrats voted to uphold a key provision of Gov. Sam Brownback’s 2012 tax policy. They gave varying explanations for their positions — with some defending the law and others saying the proposal didn’t go far enough in fixing the state’s fiscal situation.
The vote was 74-45. The legislation would have turned back the clock on the exemptions for limited liability companies and other corporate structures put in place in 2012.
The legislation — though estimated to produce more than $250 million — wouldn’t have solved the budget shortfall Kansas is facing in the next 15 months. The bill, adding more than 300,000 tax filers back onto the rolls, would have gone into effect in January 2017, with most new revenue not flowing into state coffers until 2018.
“You do the math, by the end of 2016 we will have invested almost a billion dollars into this economic incentive program to grow, maybe, 35,000 jobs,” Rep. Mark Hutton, R-Wichita, said while speaking in favor of the repeal.
He added: “It’s a math problem for me.”
Supporters of the legislation harped on the need for fairness in the tax code. Income flowing to business owners shouldn’t be tax-free while income going to their workers is taxed. Something must be done, they argued.
Rep. Sue Boldra, R-Hays, told her fellow lawmakers it was time not for retribution, but for action. Inaction was unconscionable, she said.
Rep. Tom Sawyer, D-Wichita, said the bill was a chance to start Kansas on the road to recovery. Constituents “get it” he said, but the House couldn’t admit its mistake in passing the 2012 plan.
“I think it’s time to fix this problem,” Sawyer said.
The bill split the Democratic caucus — with about half voting in favor and half against. Meanwhile, approximately a third of Republicans voted for the plan and two-thirds voted against.
The floor debate was short because few Republicans spoke. Instead, GOP House members debated the issue at length during a caucus meeting held before the vote.
Rep. Randy Powell, R-Olathe, questioned how the state would be seen if it reversed course. Powell said Stephen Moore, the conservative economist and former Wall Street Journal editorial board member, exhorted lawmakers last year to stay the course.
“It’s good politics and it’s good policy,” Powell said.
Moderate Republicans argued the bill hadn’t been properly vetted and doesn’t do enough to fully fund the needs of the state. Reps. Lonnie Clark, Susie Swanson and Don Hill said in a statement explaining their vote that they had concern the bill hadn’t been brought to the floor previously.
“This is only the first step in a very tough process in fulfilling our fiscal responsibility to the schools and agencies we have placed so much hardship on by depleting and stealing from their budgets,” the group said.
The failure of the bill likely allows Brownback to avoid making a choice over whether to sign or veto a measure rolling back the tax breaks. Last year, he explicitly threatened to veto any alteration. This year, he hasn’t said one way or the other.
A different proposal aimed at the tax exemptions remains alive in the Senate. But its prospects in the chamber are uncertain. That package, put forward by a trio of Republican senators, wouldn’t go as far as the straight repeal voted on by the House. Instead, the measure would tax 70 percent of the income flowing to business owners from their companies.
No action on the tax breaks increases the likelihood Brownback will have to take steps unilaterally to balance the budget. The governor’s office has different packages of potential budget-balancing measures, with the most severe including cuts to higher education, K-12 education and Medicaid. Lawmakers may yet take other actions to help close the shortfall, but no legislation other than the exemption repeal has yet emerged.
The business tax exemptions have had a fraught history over the past two years. Alterations were considered during the 2015 session but were decisively rejected. Ultimately, lawmakers passed hikes to tobacco and sales taxes.
In 2016 — an election year — most legislators have been quick to rule out tax hikes. For much of the session, legislative leaders have focused discussion on spending.
The Shawnee County delegation was divided on the bill, with Democratic Reps. John Alcala, Ben Scott and Annie Tietze voting for repeal of the income tax break granted owners of business entities.
Republican Reps. Ken Corbet, Lane Hemsley, Dick Jones and Fred Patton and Democratic Rep. Annie Kuether cast votes to retain the exemption from Kansas income tax.
“This doesn’t fix the problem we have,” said Kuether, who believes a broader tax reform bill ought to be hammered out to address taxing inequities and budget shortfalls.
She wasn’t convinced the Senate would take up the bill if it passed the House and expressed certainty GOP political operators would skewer Democrats by characterizing votes in support of the bill as a tax increase and giving Republican candidates a free pass.
“If you don’t think this is a gotcha, you haven’t been here long enough,” Kuether said.
Tietze, who voted for the bill, said legions of her constituents had complained about fundamental unfairness of the tax exemption for business owners. This opportunity to formally express that sentiment on the House floor shouldn’t be wasted, she said.
In addition, Tietze said Democrats in Kansas had spent years arguing for repeal of this feature of state tax policy adopted by Brownback and the GOP majority, and Democrats shouldn’t waver because the bill at hand didn’t go far enough.
“I have a large constituent base that just thinks it’s unfair,” said Alcala, another vote in favor of taxing income earned by Kansas business owners. “I think we need to put them back on the tax rolls.”