Any legislative appetite for ending an income tax exemption for 330,000 Kansas businesses may depend on the relative bleakness of a new state revenue forecast to be announced Wednesday.
A Senate committee is scheduled to hold a hearing April 28 on a proposal to do away with the often-maligned tax break. That is the day after lawmakers return from their spring recess.
The exemption for certain businesses such as limited liability companies is part of the 2012 tax cuts championed by Republican Gov. Sam Brownback. Critics say the loss of revenue from the tax break has been a major culprit in the state’s ongoing budget shortfalls, costing Kansas as much as $250 million a year.
“I’m open to any approach that restores fairness to the tax system and helps us recover some of the taxes lost through the LLC loophole,” King said.
On Wednesday, the state’s Consensus Revenue Estimating group, a panel of state officials and university economists, will issue revenue predictions for the rest of fiscal year 2016, which ends June 30, and for fiscal year 2017.
Revenue projections are expected to be revised downward, and lawmakers will need to align the state’s 2016 and 2017 budgets to those projections. The current budget is in the hole by about $30 million.
The bigger the gap, the more the urgency to fix the tax exemption, King said. While rolling back the loophole won’t help with a 2016 budget shortfall, it would help repair the tax system for 2017 and beyond, he said.
Over the weekend, Sen Jim Denning, an Overland Park Republican, said it was signaled to him that the governor would not veto a bill reversing the tax exemption. Denning is a sponsor of SB 508 with King.
That would be an important change in Brownback’s stance from the 2015 session, when lawmakers said he promised just such a veto.
In response to Denning’s remarks, Brownback spokeswoman Eileen Hawley issued a statement saying that the governor carefully considers any bill from the Legislature and that the administration would announce its proposals for balancing the budget after the new revenue estimates were released.
“A plan to raise taxes on small businesses or anyone else will not be among them,” Hawley said.
Under SB 508, 70 percent of an LLC owner’s income would be classified as wages and subject to state income taxes. The other 30 percent would be considered non-wage income and remain tax free.
“Wage income should be taxed whether someone earning it has an LLC or is someone’s employee,” King said when he introduced the bill.
On the House side, hearings were held earlier in the session on a proposal to restore taxes on LLCs while reducing the state sales tax on groceries. Groceries in Kansas are subject to the state’s full sales tax rate of 6.5 percent.
But Rep. Marvin Kleeb, an Overland Park Republican and chairman of the House Taxation Committee, said most speakers at the hearing said the recovered revenue would be needed to plug the state’s budget holes.
Even then, the consensus among committee members was to wait on any move to alter the tax exemption until the April revenue estimates were issued, Kleeb said.
“Raising taxes is politically a very difficult vote,” he said.