Keep your eyes on Kansas this week. A big part of the great tax cut experiment is hanging in the balance.
The House Taxation Committee on Monday agreed to a partial reversal of the 2013 law that exempts the owners of certain types of businesses from paying any state income taxes. Instead of paying zero, about 330,000 tax filers would have to pay a 2.7 percent tax on their income. Passive income, such as rents and royalties, 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 that Legislature needs to find to close the state’s budget deficit. Reductions in the individual income brackets, not the business taxes, took the greatest bite out of Kansas revenues.
But reversing the business exemptions would send a signal. Exactly what kind of signal depends on one’s perception.
According to news reports, Rep. Kasha Kelley warned that the reversal would constitute one of the largest tax increases on small businesses ever 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. As some lawmakers pointed out at a hearing on Monday, there is no evidence that the tax exemption for “pass through” businesses are resulting in a significant increase in jobs.
So I’m not sure how many small business owners would be incensed about having their tax rates adjusted upward. But I’m very confident that Gov. Sam Brownback, Dave Trabert of the Kansas Policy Institute, Grover Norquist the no-tax-increase pledge guy and other true believers would be apoplectic.
The business exemptions are their baby, the crux of the great experiment. To have them rolled back now would set back the entire “growth” movement, not that there is a whole lot of growing going on.
The bill passed out of the committee on a 13-8 vote because the old Democrat-moderate Republican alliance asserted itself. Whether the same coalition can gather in enough conservative votes to prevail in the full House and the Senate remains to be seen. But it’s going to be fascinating.
To reach Barbara Shelly, call 816-234-4594 or send email to email@example.com.