A budget-balancing package in Kansas is still far away, but lawmakers took a step in the right direction this week by putting the business tax exemption in play.
The House Taxation Committee agreed to a partial reversal of the 2012 law that exempts owners of certain types of businesses from paying any state income taxes. Under the proposal, advanced by a 13-8 vote, owners would have to pay a 2.7 percent tax on their income. Passive income, such as rents, would be taxed at 4.6 percent.
The adjustment would raise about $133.6 million, only a fraction of the $400 million or more that the Legislature needs to find to finish closing its budget gap. Reductions in the individual income brackets, not the business taxes, took the greatest bite out of Kansas revenues.
But the business exemption is a centerpiece of Gov. Sam Brownback’s radical tax-cutting experiment. Owners and partners of certain types of businesses, including single proprietorships and limited liability corporations, now pay no Kansas taxes on business profits they declare as their personal income.
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Brownback and his allies insist the full tax exemption will encourage businesses to start up in Kansas and increase hiring.
More lawmakers are becoming skeptical about that, however. And the number of Kansans taking advantage of the full deduction has morphed far beyond the original projections.
Researchers originally had thought 191,000 tax filers would take advantage of the break. At last count, about 330,000 owners, partners and farmers were claiming the exemption, at a cost to the state of $207 million.
Even some lawmakers who voted for the bill now regard it as unfair to single out certain Kansans for such favorable treatment. The partners in a law firm don’t have to pay state income taxes, for instance, while their associates and administrative assistants must ante up.
The Brownback administration insists the tax exemptions are resulting in new economic growth, but there is scant data to back up that claim.
Not all lawmakers are giving up on the exemption.
Rep. Kasha Kelley, a Republican from Arkansas City, expressed confidence the tax perk would result in job growth and warned that even a partial reversal would constitute one of the biggest tax increases ever on small businesses in Kansas.
But the 100 percent exemption was an entitlement that small business owners hadn’t asked for or expected.
Many single proprietors, partners in limited liability corporations and others who received the break are still befuddled about why they’re not paying state income taxes when their neighbors are and nothing has been expected of them in return.
It’s quite likely that Kansas business owners would be less upset about losing the exemption than Brownback and his allies in the Kansas Chamber of Commerce and at various supply-sider think tanks.
Other budget-balancing options on the table are sales tax increases, property tax hikes, a higher gasoline tax, a hefty tax increase on sales of alcohol and tobacco products and more cuts in government services.
Brownback, has said he wants the business tax exemptions left intact and favors bringing in more revenue through increases in the sales tax or other consumption taxes.
But Brownback’s method places more of a burden on Kansans with low and middle incomes, while continuing to give certain residents a free pass on the income tax. It hasn’t worked yet, and doubling down won’t make it work any better.
Lawmakers who are questioning the wisdom of the business tax exemption are on the right track. They should keep going.