Topeka A national tax research group that is generally thought of as conservative and business-friendly said on Wednesday that Gov. Sam Brownback's elimination of taxes for many business owners has problems
The Tax Foundation supported the part of the tax reform legislation signed into law by Brownback that cut the individual income tax rates of 6.45 percent, 6.25 percent and 3.5 percent to just two rates at 4.9 percent and 3 percent.
But the Washington D.C.-based group didn't support the part of the law that exempts from taxes certain business owners' profits.
“A pass-through business owner typically pays themself a salary, which is taxed as wage income on their income tax return,” said Tax Foundation economist Mark Robyn. “Additional profit above and beyond the business’s cost of doing business is reported as one of several forms of business income on the business owner’s tax return and also taxed under the personal income tax. The new Kansas law would make this non-wage income exempt from taxation,” Robyn said.
Brownback has said the change will stimulate the economy like an adrenaline shot to the heart. He said that the tax cuts will create 22,900 new jobs, give $2 billion more in disposable income to Kansans and increase population by 35,740, in addition to normal population growth.
The tax cuts, Brownback said, will "help make Kansas the best place in America to start and grow a small business."
But the Tax Foundation said "we see a few problems with the small business provisions."
The tax exemption will create an incentive for businesses to structure as pass-throughs for tax purposes, the report said.
"Instead of the Kansas tax system treating similar activity similarly, the system will encourage economically inefficient, though tax-reducing, activities.
"While this can be difficult and complicated, especially in business taxation, Kansas’s decision to exempt one type of business structure completely from taxation (pass-throughs) while continuing to tax others (C corporations) is problematic. It rewards certain business structures while punishing others. There is no sound economic justification for treating these two types of business activity so dramatically differently," the report said.
And the report concludes that while tax reductions can have positive economic benefits "they will cost revenue and will ultimately have to be paid for either by cutting spending or increasing taxes elsewhere."
Legislative staff research have reported that the tax cuts will produce a budget deficit in the $2.5 billion range within six years. Brownback has disputed this will happen.