Topeka As Kansas lawmakers continue to look for ways to dig the state out of a projected $406 million budget hole for next year, Republicans remain sharply divided over the question of reversing course on the sweeping income tax cuts enacted in 2012, which many say are the cause of the state’s current budget woes.
Both the House and Senate tax committees worked on bills Tuesday that would peel back at least part of the tax cuts that exempted more than 330,000 business owners from paying any taxes on their business income.
But conservative Republicans are putting up fierce resistance to any such attempt, and it remains to be seen whether they still have the power to defeat such a measure on the floors of the full House and Senate.
“Clearly, this is not a tax plan that has failed,” said Rep. Kasha Kelley, R-Arkansas City, who serves on the House tax committee. “This is a tax plan that is taking some time to take root, as all new things do, and to send a signal that it doesn’t work to the rest of the nation, I think, is detrimental.”
The House committee worked on a package Tuesday that includes a provision to reimpose taxes on what is called “guaranteed payments” for certain business entities. That’s money paid to partners in certain businesses, either for the use of capital or for services rendered as a partner, independently of whether the business turns a profit.
Under federal tax law, guaranteed payments are not considered wage income, and therefore under the cuts enacted in 2012 are exempt from state income taxes.
That’s expected to raise about $23 million next year. Kelley offered a motion to remove it from the House tax bill, but her motion failed on an unrecorded voice vote.
The panel did, however, remove another part of the proposal that would have frozen other income tax rates at their current level, thus ending Republican Gov. Sam Brownback’s hopes of phasing out income taxes altogether, a plan sometimes referred to as the “march to zero.”
“Philosophically, I’m against going back on what we did (in 2012),” said Rep. Marc Rhoades, R-Newton, who offered the amendment to remove that provision.
Rhoades also dismissed questions that he said some Republicans have begun raising about the fairness of exempting so many business owners from income taxes while the state is facing such a large financial hole.
“We would not be having this discussion in our party (about) the fairness issue, in my opinion,” Rhaodes said. Maybe a few (would). But if there wasn’t a hole, we wouldn’t be having this discussion.”
The House panel plans to finish debating its package Wednesday. Currently, it also includes increases in taxes on retail sales, motor fuel and cigarettes, as well as adjustments to certain itemized tax deductions.
Senate tax plan
Meanwhile, the Senate tax committee advanced a bill Tuesday that would raise an estimated $496 million in new revenue next year, enough to fill the budget hole and leave the state with a positive ending balance at the end of the year.
That panel also advanced another bill that’s meant as an incentive for lawmakers to wrap up the session this week. It’s a bill that would cut off all legislative pay after Friday, which will be the 96th day of the session.
The Senate tax bill includes a provision to reimpose income taxes on business owners, but would offer them a tax credit based on a percentage of their payroll for employees. That would raise about $82 million next year. It also includes many of the provisions in the House bill regarding sales, motor fuel and cigarette taxes, along with changes in the way motor vehicles are taxed.
Sen. Less Donovan, R-Wichita, who chairs the panel, said that would be a more direct incentive for small businesses to hire more workers, something that the exemption on business income was supposed to do.
But conservatives on that committee resisted as well. The bill narrowly passed out of committee, 6-4, without a recommendation.
Democrats on both committees are also opposing the bills.
Rep. Tom Sawyer, the ranking Democrat on the House panel, said many in his party will not consider raising any other tax until the exemption on business owners’ income is removed.
The Senate could vote on its tax bill as early as Wednesday. There was no immediate word Tuesday on how quickly the House might vote on its forthcoming tax plan.