Topeka — The influential Kansas Chamber of Commerce and some conservative Republican legislators are considering canceling a scheduled decrease in the state sales tax, but only if lawmakers agree to another cut in the state’s income tax.
A first round of income tax cuts enacted in May and set to take effect Jan. 1 has left the state with a projected $295 million budget shortfall for the fiscal year that begins in July. The expected shortfall has led to speculation that Gov. Sam Brownback will propose keeping the state’s sales tax at 6.3 percent, and the conservative Republican governor hasn’t ruled out the idea.
The sales tax is set to drop to 5.7 percent in July because of a promise made in 2010 by legislators and Brownback’s predecessor, Democratic Gov. Mark Parkinson, when they increased the rate from 5.3 percent to 6.3 percent to avoid cutting aid to public schools, social services programs and other state spending. Legislators in both parties have said it’s important to keep the promise.
But conservative Republicans also want the Legislature to phase out individual and corporate income taxes, which they say will stimulate the economy. The Chamber of Commerce, which helped conservative Republicans win control of both the House and Senate in the November election, is waiting to see what Brownback proposes, but top officials said they might accept a sales tax freeze in return for lowering income taxes further.
That creates a dilemma for lawmakers who might normally consider a sales tax freeze the equivalent of a tax hike, but who also want to eliminate income taxes as quickly as possible. Legislators are expected to debate such a tax shift after they convene their 2013 session on Jan. 14.
“I’m open on the tax situation,” said Sen.-elect Steve Fitzgerald, a conservative Leavenworth Republican who’s been appointed to the budget-writing Ways and Means Committee. “Economic growth is THE issue, and taxes are part of it.”
Keeping the sales tax at 6.3 percent would raise at least $250 million a year in additional revenue. However, any such proposal, whether it’s tied to income tax cuts or not, would face strong opposition from Democrats.
They say income tax cuts mainly help the wealthy and relying more on the sales tax will hurt lower-income families by boosting the cost of groceries, clothing and other basic consumer goods.
“We’re going to put a bigger burden on working families,” said Rep.-elect Tom Sawyer of Wichita, who’ll serve as the ranking Democrat on the House Taxation Committee. “I think it’ll look bad if we go back on that promise.”
The income tax cuts due to take effect Jan. 1 drop the top individual income tax rate to 4.9 percent from 6.45 percent and exempt the owners of 191,000 businesses from income taxes. They are expected to cost the state an estimated $4.5 billion over the next six years.
Brownback initially proposed offsetting that loss by holding the sales tax rate at 6.3 percent and eliminating popular income tax deductions for charitable contributions and interest paid on home mortgages. But lawmakers rejected those ideas.
“It was either this or nothing, so it’s fine — I said, ‘All right, let’s go forward,” Brownback told The Associated Press during an interview last week. “If you’re growing, you’ve got a lot more options and a much more sustainable budget picture than if you say, ‘We’re going to keep our taxes where they are or raise them’ and further hurt your growth.”
Brownback said he still supports those ideas as a means to pay for the income tax cuts, and his budget director, Steve Anderson, suggested to conservative lawmakers earlier this month that a sales tax proposal is coming. However, Brownback wouldn’t confirm that he’ll push the idea.
The Kansas Chamber opposed the sales tax increase when it was enacted in 2010 because it was used to support state spending and not offset other tax cuts. Kent Eckles, the group’s vice president of government affairs, said the chamber opposes efforts to retain the current sales rate or boost other taxes to bolster the budget.
But he also said the chamber wants to eliminate state income taxes completely. If Brownback proposes exchanging a sales tax freeze for more income taxes, “we may be open to that,” he said.
Senate tax committee Chairman Les Donovan, a conservative Wichita Republican, said he wasn’t sure whether the GOP’s “super-conservatives” would go for such a plan.
But he added, “Would I trade an increase in the sales tax, personally, for a decrease in income taxes? Yeah.”