The battle over tax breaks for Kansas businesses opened anew Thursday as lawmakers wrestled over how to close a large budget shortfall in an election year.
The state’s 2012 tax policy has allowed more than 300,000 entities to flee the tax rolls, a figure far more than initially estimated that now has some lawmakers condemning what they see as the unfairness of business owners collecting income tax-free while their workers continue to pay.
Legislation put forward by three Republican senators once again would tax income flowing to the owners of limited liability corporations and other business structures. Supporters and opponents of the rollback sparred Thursday over whether the change would bring fairness to the tax code or simply amount to a tax hike at a time when some say Kansas should focus its budget-balancing efforts on spending.
The bill would tax business owners’ wage income. The legislation, Senate Bill 508, uses a federal standard to define wage income as 70 percent of the income flowing to the business owner from the LLC. The other 30 percent would remain tax free.
The state budget director estimates the legislation would generate about $170 million during the next fiscal year. The amount would go far in closing the $228 million shortfall facing the state during the next 15 months.
The bill’s fate after a hearing in the Senate Tax Committee remains unclear, but no rollback increases the likelihood the Legislature will turn to proposals put forward by Gov. Sam Brownback to balance the budget that would affect funding sources for higher education, highways and children’s programs. Brownback hasn’t made clear whether he would sign or veto a bill eliminating business tax breaks.
The Legislature reconvened Wednesday for its veto session, the final part of its yearly session. Lawmakers could work for days or weeks.
Election-year politics hang over the fight. Every House and Senate seat is up for grabs in November, and jockeying over potential gubernatorial runs likely will begin soon thereafter.
“To be blunt, the loophole in my opinion is a losing hand, politically. In 2016 and 2018 statewide elections, the Republican Party is likely to reap that whirlwind if mid-course corrections are not made, and made now,” said Jim Eschrich, a Kansas City-area market researcher.
“It’s simple in my mind. Politics is about the public’s perception, and the perception — right or wrong — is that the state’s finances are in serious trouble. The public is unnerved, and, frankly, so am I.”
The focus on the LLC exemptions is misplaced, argued Sen. Les Donovan, R-Wichita. Donovan, who owns a car dealership, said the majority of the revenue lost because of the 2012 tax cuts isn’t from exemptions for business owners.
Nevertheless, Donovan introduced legislation dealing with business taxes on Thursday, though he declined to divulge details.
Donovan, the Senate Tax Committee chairman, said as a business owner he pays himself salary and pays taxes on it. He urged the media to get out what he called the correct story — that most of the lost revenue is because of personal income tax cuts.
“It’s never, ever told that way, and the public is up in arms over it because they see these wealthy business owners getting a free ride,” Donovan said. “It’s not true folks, not true.”
The public received a tax cut, Donovan said. He added most people don’t realize it.
A fall 2015 poll conducted by the Docking Institute of Public Affairs at Fort Hays State University showed that 67 percent of Kansans favor higher taxes on large corporations and 63 percent favor increases on wealthy individuals. More than 60 percent also wanted lower overall taxes and spending.
The Kansas Chamber of Commerce, which opposes changing tax exemptions for business owners, urged lawmakers to hold steady. Chamber lobbyist Eric Stafford said the Legislature’s makeup had changed significantly since 2010. The chamber fought to remove a number of Republican lawmakers who stood in the way of the 2012 tax cuts.
“Many in this room were elected on a low-tax limited government platform and we would ask that you maintain that commitment to Kansas taxpayers and hold spending in line,” Stafford said.
In order for the Senate Tax Committee to advance the bill to the Senate floor, the measure probably will need support from Democrats, as well as some of the panel’s Republicans. Senate Minority Leader Anthony Hensley, D-Topeka, predicted the bill wouldn’t move to the floor.
Hensley said he would need to meet with other Senate Democrats before saying exactly what Democrats would or wouldn’t support if a bill comes up for debate in the Senate.
“I would be inclined to support some sort of a rollback, maybe not in this form,” Hensley said.
Sen. Julia Lynn, R-Olathe, said the Legislature needs to clarify the intent of what it passed in 2012. Proponents of Senate Bill 508 — most prominently Sen. Jeff King, R-Independence — have said the Legislature never intended to exempt wage income.
Lynn said the bill probably does clarify legislative intent, though she said after listening to the bill’s opponents, lawmakers need to be careful about sparking tax code confusion. That could create a result worse than fixing what she called the loophole itself.
“I can tell you that’s where the problem is,” Lynn said. “It’s in the interpretation of what we passed in 2012.”