The Kansas House on Tuesday tentatively passed a massive plan for reducing individual income taxes while protecting key tax credits for the working poor and removing sales taxes from food.
While generally not as aggressive as the tax plan proposed by Gov. Sam Brownback, the House measure would trim rates for individual taxpayers as state revenues grow.
The tax debate now turns to the Senate, which will be holding hearings on Brownback’s tax plan this morning.
The House plan’s income tax cuts would depend on state revenue growth of more than 3 percent, with the emphasis on lowering income tax rates for moderate and low-income taxpayers first.
The House will vote on the bill again today before forwarding it to the Senate.
The plan retains many of the tax credits and deductions that Brownback wanted to eliminate, including deductions for interest paid on home mortgages and charitable contributions. The House also kept intact the earned income tax credit for the working poor although the tax benefit would be cut in half in 2014.
And unlike the governor, the House would let part of a penny sales tax increase expire as scheduled on July 1, 2013.
In roughly five hours of grinding debate, supporters said the plan was a necessary step to ignite the Kansas economy while corralling the growth of government.
“The bill allows the economy to grow,” said state Rep. Richard Carlson, a St. Marys Republican and one of the tax bill’s architects.
Carlson said the measure was a bill for all Kansans.
“The working poor were taken care of in the bill today,” he said. “They want a job. Let’s take care of taking jobs to them.”
Critics, meanwhile, said the bill would impede government’s ability to fund critical services because it channels new revenue growth to reducing income taxes.
They predicted the spending cap — or a tax trigger as some call it — would eventually hurt schools, social services and the court system. They said lawmakers were taking a leap of faith with the bill.
“Conservative usually means I don’t take high risks. This is a very high risk,” said Rep. Nile Dillmore, a Wichita Democrat and the ranking minority member of the tax committee.
“You’re taking a risk that if I eliminate income taxes for this group of people over here, everybody else in the state is going to make a ton of money and pay more taxes,” Dillmore said. “That’s the bet you’re making. That’s a very high-risk bet.”
After Tuesday’s debate, senators said they were concerned about the cost of the House bill, especially after the chamber passed amendments that could cost hundreds of millions of dollars even with a projected state surplus approaching $500 million.
“Our budget surplus just went out the window,” said Sen. John Vratil, a Leawood Republican. “I can tell you, as a senator, I would never vote for a bill if I didn’t know what it costs.”
Republican Sen. Les Donovan of Wichita heads the tax committee in his chamber. He predicted that there’s a lot more work to be done.
“Before we get out of here, hopefully we’re going to come up with some kind of a plan, something that takes us down on tax rates,” he said.
Brownback wouldn’t say much about the House tax plan, which was developed after lawmakers heard complaints about the governor’s plan to eliminate many tax credits and deductions.
“We’ll look it all over. We’re moving the process forward. We need to do that,” Brownback said.
A new twist that emerged Tuesday was the elimination of food sales taxes.
Neither the House nor the governor had talked about this idea, but some lawmakers thought it was the best way help taxpayers directly.
“We need to put more money in the back pocket of every single person in Kansas,” said state Rep. Jana Goodman, a Leavenworth Republican who pushed the food sales tax proposal.
Currently, taxpayers who make less than $35,400 a year and meet certain requirements can apply for a food sales tax rebate on their income taxes. The average food sales tax rebate is $141. Goodman said her proposal would benefit taxpayers every time they went to the grocery store instead of having to wait until the end of the year for a sales tax rebate.
However, the House did put the clamps on the proposal by allowing cities and counties to opt out of the law if they choose.
The food sales tax provision would take an estimated $350 million out of the state coffers, which raises doubt about how long it will stay in play.
The House did move ahead with one Brownback proposal. It agreed to eliminate taxes on the income of 191,000 small businesses owned by sole proprietors, companies organized as S corporations and small groups that form limited liability corporations.
Kansas doesn’t tax these businesses directly, but allows them to pass their profits directly to their owners. The owners then pay individual income taxes on the earnings. Businesses that are incorporated pay taxes directly.
The plan approved Tuesday would exempt the first $100,000 in nonwage business income from taxes from 2013 to 2015. The exemption would increase to $250,000 the next two years and would be eliminated starting in 2018.
The House had to remake its plan on the floor after lawmakers were criticized for using money from a new state highway plan to pay for the tax cut.
Lawmakers restored $350 million to the highway plan after transportation officials expressed concern that they might not be able to deliver road projects on time.
House lawmakers also reversed a controversial plan to make all refundable tax credits nonrefundable.
The idea had been added to the bill by a House committee and would have had the effect of making some tax credits for the poor less valuable.
A refundable tax credit can reduce your tax liability below zero because it’s possible to receive a refund even when you don’t owe taxes. A nonrefundable tax credit can only reduce the amount of taxes you owe to zero.