Three Republican state senators introduced a bill Tuesday to restore taxes on limited liability company owners who are now exempt from Kansas income taxes.
Senate Vice President Jeff King, an Independence Republican, said it was an issue of tax fairness — and necessary given the precarious state of the Kansas budget.
“Wage income should be taxed whether the person earning it has an LLC or is someone’s employee,” King said. “It’s time to make sure every person who earns a wage pays the same low income tax rate.”
King said the bill is the same measure he introduced last May during the contentious tax debate in the Legislature. It would reinstate income tax on wage income for LLC owners.
After recently passing a bill to fill a huge shortfall in the fiscal year 2016 budget, legislators learned last week that tax receipts for February were more than $50 million below estimates.
“We have to face the reality that this is a long-term structural budget issue, and we need long-term spending cuts and tax decisions,” King said.
Sens. Greg Smith and Jim Denning, both of Overland Park, joined King in introducing the bill.
Smith said the Legislature did not intend to eliminate taxes altogether for LLC owners.
“There’s no way we can have a tax plan that effectively lets a certain number of people slide in terms of wage income,” Smith said.
Critics have blamed the loss of tax revenues from LLCs as one of the major culprits in the state’s ongoing budget challenges.
Gov. Sam Brownback has staunchly defended the income tax exemption and has opposed changes in current tax policy. King said Brownback last year almost immediately threatened to veto his bill.
“As the governor has previously said, he will not support or call for a tax increase on small business in Kansas,” said Eileen Hawley, Brownback’s spokeswoman.
King said Kansas became the lowest income tax state in the region as a result of the Brownback-led income tax rate cut in 2012 from 6.45 percent to 4.6 percent.
But the plan to eliminate individual income tax on nonwage business income for LLCs created a loophole that exempted some 330,000 businesses from all state income taxes, King said.
The bill would tax wage income of business owners and exempt nonwage or investment income from income taxes. A formula would define 70 percent of all business income as wages and 30 percent as investment income.
Denning said he believes the Legislature has the votes to pass a bill to close the loophole.
“We must close the LLC loophole,” Denning said in a written statement. “It grows bigger every year, costing Kansas at least $250 million annually. It continues to make the budget unstable.”