At a Kansas Senate committee hearing Thursday, a proposal to restore income taxes on more than 330,000 business owners drew strong opposition from some Kansas business groups but support from several Kansas City area business organizations.
Three Republican senators introduced the measure, saying it was needed to bring fairness to the tax system and would add much-needed revenue to state coffers to close a huge budget hole.
Sen. Jeff King told the committee that the business income tax exemption, enacted in 2012, wasn’t intended to exempt all income for certain businesses such as limited liability companies, but that was the effect.
“That’s not fair,” said King, who is sponsoring the bill to roll back the tax break with Sen. Jim Denning and Sen. Greg Smith, both of Overland Park.
“There is a greater understanding developing in this state and across the country that the lower we can get taxes the better, but with that, the fairer we can get taxes the better,” King said. “The loophole takes away that fairness.”
Denning said many of the businesses that take advantage of the exemption are single-person companies without employees. Exempting all of their income, including wage income, “makes no sense,” he said.
But opponents lined up against the measure, Senate Bill 508, including the Kansas Chamber of Commerce, the National Federation of Independent Business, the Kansas Society of CPAs and the Kansas Policy Institute. Several Kansas City area business groups, though, supported it.
Eric Stafford with the Kansas Chamber of Commerce told committee members the state’s budget problems are due to spending and efficiency issues, not the tax exemption. And he warned lawmakers that the bill as written is confusing and could cost some business owners more in taxes than is intended.
“Taxes still remain the top concern for business owners, whether it’s property taxes or income taxes,” Stafford said.
“We’re trying to grow the private sector here, folks,” he said. “Would you rather have more money in the pockets of private-sector business owners or in state government? We prefer that taxpayers hold on to more of their money.”
Several business groups from the Kansas City area offered written testimony in favor of the bill. They included the Lenexa, Overland Park and Greater Kansas City chambers of commerce.
“We need a predictable, balanced and fair tax revenue stream that generates an adequate income for the state,” Tom Robinette of the Overland Park Chamber of Commerce said in a letter. “Asking business owners to pay their share is at least a start toward a fair and responsible response to that problem.”
Dave Trabert, president of the Kansas Policy Institute, told legislators instead that the state needed to increase efficiency and cut spending.
“We find this to be an unnecessary tax increase,” Trabert said. “We should balance our budget by getting spending under control.”
Sen. Les Donovan, a Wichita Republican and chairman of the Senate’s tax committee, said after Thursday’s hearing that he might schedule another hearing for next week on a different method for altering the exemption. Asked if he thought a rollback bill could advance this session, he said, “I don’t feel like I’m picking up a lot of interest.”
SB 508 differentiates between wage and nonwage income for owners of limited liability companies. It would tax 70 percent of the business owner’s income as wages, and 30 percent would remain tax-free as nonwages. The bill would take effect July 1.
Rolling back the tax exemption has become a rallying cry for critics of the Gov. Sam Brownback-led 2012 and 2013 tax cuts and a target for some who want to increase revenue as a way to close a $290 million shortfall in the budget. The tax cuts reduced individual income tax rates by about 30 percent.
The state has missed revenue estimates 11 of the past 12 months, and last week the state’s revenue estimating group revised revenue projections downward for the rest of this fiscal year and for fiscal year 2017, which begins July 1. That resulted in a $290 million budget shortfall through June 2017.
A full repeal of the tax exemption would bring in an estimated $200 million annually. The rollback in SB 508 would come to about $170 million.
King said that when he introduced an identical proposal last year, Brownback immediately threatened to veto it. Brownback has maintained that his tax policy boosts Kansas businesses and job growth, and he said recently that he opposed any measures that would increase taxes on small businesses.
Several opponents of the administration’s tax policy said Thursday that SB 508 doesn’t go far enough and doesn’t bring stability to the budget. Legislators also should reverse the income tax cuts from 2012 and 2013, they said.
Bernie Koch with the Kansas Economic Progress Council said the state sales tax, which the Legislature increased last year, is a burden on businesses and a drag on the economy. The income tax cuts aren’t boosting the economy, he said, and a more balanced tax policy is needed.
Democrats on the Senate’s tax committee said the proposal was too little, too late from the Republican sponsors of the bill, and they were skeptical the bill would move forward this year. The Legislature is in the wrap-up stages of the 2016 session.
“It’s an election year conversion,” said Senate Minority Leader Anthony Hensley, a Topeka Democrat. All Kansas House and Senate seats are up for election this year. “And it’s at the last minute,” he said.
Sen. Tom Holland, a Baldwin City Democrat, said the measure would not fix the state’s current shortfall or change the long-term outlook for the budget.
Earlier this week, Standard & Poor’s warned the state that the rating agency could downgrade Kansas’ AA bond rating in the next 90 days. The state needed to address its ongoing budget shortfalls by taking action to bring revenues and expenditures in line, S&P said.
“This will not make us fiscally sound,” Holland said.