TOPEKA | Gov. Sam Brownback on Wednesday proposed sweeping changes in the Kansas income tax code to cut individual income tax rates and help thousands of small businesses, but his plan also would eliminate credits and cancel a scheduled decrease in the state sales tax.
The Republican governor said in his annual State of the State address that he wants to "turn Kansas into an incubator for innovation and entrepreneurial success." His administration has been hinting for months that major tax proposals were coming, and his speech to a joint session of the Legislature provided them with their first details.
"I firmly believe these reforms will set the stage for strong economic growth in Kansas," Brownback said in remarks from the speech, which were released ahead of time. "And I will put more money into the pockets of Kansas families and businesses."
Brownback wants to collapse the state's three individual income tax brackets into two and give the state the second-lowest top tax rate in the region.
He also would eliminate the individual income taxes on business income reported by the operators of limited-liability corporations and sole proprietorships on their taxes, a change that will affect about 191,000 business tax filers annually. But the governor did not propose any change in corporate income tax rates.
To offset his proposed reductions, Brownback would make permanent a 2010 sales tax increase that is set to decrease on July 1, 2013. Instead of falling to 5.7 percent, the rate would remain at 6.3 percent.
Brownback also asked legislators to limit future government spending growth to no more than 2 percent a year, earmarking all excess revenue to reducing state tax rates.
"This will get us ever closer to the pro-growth states with no state income taxes, which are among the country's strongest economic performers," he said.
In Democrats' response to the speech, House Minority Leader Paul Davis, of Lawrence, said that in considering tax cuts, reducing property taxes should be the state's first priority because they've increased 65 percent over the past decades. Democrats already have unveiled a plan to dedicate part of the future growth in state revenues to property tax relief and part of it to aid to public schools.
Kansas' current tax rates for married couples filing jointly are 3.5 percent on the first $30,000 of their income, 6.25 percent on the portion of their incomes between $30,000 and $60,000, and 6.45 percent on the portion above $60,000. Brownback's plan would impose rates of 3 percent on the first $30,000 of married couples' income and 4.9 percent on the portion above that.
Brownback also calls for ending an exemption from the state's mineral severance tax for production from new oil and natural gas pools, a move to capture the revenue from short-term yields from new wells in southern Kansas that utilize hydraulic fracturing. The wells typically have a short life expectancy, and removing the exemption allows the state to collect taxes before the wells are tapped out.
Brownback said his tax plan will be close to revenue-neutral — meaning it would not reduce overall tax collections — but will make the income tax fairer, simpler and, in his words, "flatter."
Last session, the House approved a bill that would reduce the state income tax rates each year collections exceed the previous year's totals. The reductions would apply to corporate and individual income taxes.
The bill stalled in the Senate but is likely to be revived. The Senate has appointed a commission to study tax reform that begins meeting Friday. Among the handful of alternative proposals under review is one that would reduce the sales tax increase on Jan. 1, 2013, six months earlier than scheduled.
Kansas has seen steady economic improvement since Brownback's first State of the State a year ago. The unemployment rate fell to 6.5 percent in November. But momentum was tempered last week when Boeing Co. announced it is closing its Wichita defense plant, eliminating 2,100 jobs.
Brownback and the GOP-controlled Legislature will have $200 million to $300 million in reserves as they begin writing the budget for the fiscal year beginning July 1.
Brownback is asking state agencies to reduce spending and push for efficiencies. In 2011, the governor downsized many state functions and pared the state workforce by eliminating about 2,000 vacant positions and offering a voluntary early retirement program.
The governor wants an ending balance of $465 million, reserves that would exceed an often-ignored legal guideline for 7.5 percent of expenditures. He said the budget would "fully fund or increase funding" for essential services while holding spending below current 2012 levels.
In the Democratic response, Davis argued that past cuts in general aid to public schools should be reversed. Last year, at Brownback's urging, the GOP-controlled Legislature cut it nearly 6 percent to help balance the budget. Davis said a commitment to education is "the underpinning of what it means to be a Kansan."
"People move to Kansas — and people stay in Kansas — because this is a great place to raise a family," Davis said in his prepared response. "But no family wants to fork over hundreds of dollars in new school fees or swallow skyrocketing property taxes because the state has neglected to fund their child's school."