If Jim Denning has anything to say about it — and he most certainly does — the days of cutting expenses to dig out of the impending $600 million deficit in Kansas are pretty much over.
The conservative Republican state senator from Overland Park, who serves as vice chairman of the powerful Senate Ways and Means Committee, told me he thought Kansas had cut enough and that there really were few significant places to cut further.
Denning’s leadership role automatically gives him an important seat on the Conference Committee, which has three members from the Senate and three from the even more conservative House.
Denning believes Kansas is in a short-term liquidity crunch, and he has specific recommendations to deal with that crunch. He believes the Legislature, once it comes back from recess on April 29, will deal with the budget in short order, not enter into the prolonged session some are predicting.
Let’s start with what Denning thinks is not going to pass in the Legislature.
No. 1 is no repeal or backtracking on the current income tax rates that were dramatically cut three years ago. (I would add that critics who call for their repeal are out of touch with reality and are wasting their energy.)
The governor’s proposal to raise taxes on liquor and tobacco, in Denning’s words is “dead, dead, dead.” However, Denning does see an opportunity to raise $5 million to $10 million a year in taxes on e-cigarettes, a number that will grow as e-cigarettes become more popular.
From there, Denning proposes a list of items where major revenues would be raised by tax increases and by closing loopholes. The revenue projections are his own.
▪ “Fix” the loophole in the “LLC exemption.” Kansas does not tax owners of small businesses (and farmers) who file their corporate taxes as individuals. The current law does not reflect “legislative intent,” according to Denning. The small business pass-through exemption was always intended to tax owner’s wages, while allowing non-wage income (business income) to pass through tax-free. Closing the loophole would save about $110 million.
▪ Raise the sales tax back to the rate of 6.3 percent from 6.15 percent, bringing in $55 million a year. (This was always the Senate’s position. The House did not agree but might now.)
▪ Raise the gasoline tax by 5 cents, totaling $80 million in new revenue.
▪ Plug a loophole that would tax business income earned in Kansas by non-residents of Kansas, thus bringing in $50 million a year. This could be fixed with a modification to the “passive income tax law.”
▪ Make policy changes in Medicaid, which would save $50 million a year. These policy changes would be the result of pharmaceutical changes. No reduction in services would result from this policy change, according to Denning.
▪ Tighten up on the Medicaid eligibility error rate, which currently gives eligibility to those not eligible. Denning says the error rate in Kansas is 12.3 percent versus a national average of 3 percent.
Bringing that down 2 percentage points would yield $26 million a year.
▪ Increase the Managed Care Organization (MCO) privilege tax from 1 percent to 5 percent. Raising the tax on the three health care companies that administer KanCare, the private Medicaid program in Kansas, would raise $75 million to $80 million a year in federal matching funds.
▪ Itemized deductions would get a “50 percent haircut,” beginning on Jan. 1, 2015, rather than Jan. 1, 2017, generating $50 million for fiscal year 2016.
▪ A tax amnesty for delinquent taxes would bring in $30 million for the coming year.
▪ $30 million would be realized from the “arbitrage” of paying 4.33 percent on bonds for the Kansas Public Employees Retirement System (KPERS) and realizing a 7.5 percent return on investing those funds.
This totals nearly $600 million. Denning seems confident these recommendations will be received well in both chambers.
The all-important April tax revenue consensus estimate will be out before the next session begins. Hopefully, the deficit will not be any worse.
To reach Steve Rose, longtime Johnson County columnist, send email to email@example.com.