Kansas House rejects bill to repeal income tax cuts

photo by: Peter Hancock

A conference committee on tax issues agrees to send a bill to the full Legislature that would repeal the 2012 tax cut that exempts more than 330,000 farmers and business owners from paying taxes on their business income.

TOPEKA — The Kansas House on Friday rejected a bill to reinstate income taxes on more than 330,000 farmers and business owners after many of the Democrats and moderate Republicans who have complained most about that exemption for the last five years joined with a number of conservative Republicans and voted against repealing it.

The bill failed on a 45-74 vote. Fourteen Democrats joined 31 Republicans in voting for the repeal. Twelve Democrats, including House Minority Leader Tom Burroughs of Kansas City, joined 62 Republicans in voting against it. Two Democrats and four Republicans were absent.

Lawrence Reps. Barbara Ballard and Boog Highberger, both Democrats, and Republican Tom Sloan all voted in favor of repealing the tax exemption.

Rep. John Wilson, D-Lawrence, voted against the bill.

“I’m sure it can strike people as odd,” Wilson said after the vote. “I weighed this really heavily and we all could have voted for it today, and it’s most likely not going to go anywhere in the Senate, and certainly the governor’s not going to sign it. And even if it passes and the governor does sign it, we’re still going to have to make $290 million in budget cuts. We still have the highest sales tax in the country. We still have no way to pay for schools. And we’re going to be back next year having more tax conversations.”

The exemption was part of a sweeping package of tax cuts that lawmakers passed in 2012. It exempts from state income taxes all of the income people derive from certain business operations such as partnerships, limited liability corporations, sole proprietorships and so-called S-corporations, which are another type of business in which the income of the business is also the personal income of its owners.

The bill would have repealed the exemption starting Jan. 1, 2017, which means the state only would have received revenue from it during the last two quarters of the next fiscal year.

The most recent revenue estimates forecast that Kansas revenues will fall $291 million short of approved expenditures between now and the end of the next fiscal year.

The Kansas Department of Revenue, though, estimated that passage of the bill would only produce about $61 million next fiscal year, and $205 million in the following fiscal year.

Tax negotiators from the House and Senate had agreed earlier in the day to put the bill up for a vote, acknowledging that many lawmakers had insisted on being allowed to cast a recorded vote, and that many of their constituents have criticized the tax policy since it was enacted in 2012.

Rep. Mark Hutton, R-Wichita, who has long been a critic of the business exemption, said many House members want a public vote on the bill, even if it’s a no vote, just so they can be on record about the issue heading into the 2016 election cycle.

“They believe it’s time to at least have the conversation,” he said. “I’ve been saying that since day one of this session. It’s time to have the conversation, it’s time to have the vote, and let’s put it to bed.”

Rep. Stephanie Clayton, a moderate Republican from Overland Park, was one of several moderate Republicans who voted against the bill. She said before the vote that the bill did not go far enough in providing a long-term solution to the state’s financial needs.

“I think that if we’re going to come out of this with responsible budgeting (and) with a balanced budget, which is what the people of Kansas who pay our taxes and run this government for us really deserve, then we need to make sure that we have a very high-quality, solid plan, and we need to make sure that we are working together as a team — House, Senate and the second floor (governor’s office) — to make the best decisions possible for the state,” she said.

On the House floor, though, a number of Democrats argued forcefully in favor of the bill.

Rep. Henry Helgerson, D-Wichita, said the business exemption was effectively shielding from taxation $3.4 billion of income from the 2,400 wealthiest people in Kansas, those who make over $500,000 a year.

“Rather than providing it for state government, rather than providing an equitable tax structure, we’re giving it to the wealthiest of this state,” he said.

He said those individuals, whose incomes average $2.1 million a year, receive 35 percent of the benefit of the exemption for business income.

With the bill’s defeat, lawmakers now must turn their attention to balancing the state’s budget.

Last week, the Brownback administration outlined three options for closing the budget gap, all of which involve sweeping $185 million out of the state highway fund to shore up the general fund, forcing delays in about two dozen major highway expansion and modernization projects. He also is calling for a 3 percent, or $17.7 million, reduction in funding to the state’s six universities.

In addition to those moves, Brownback is asking lawmakers either to allow his administration to sell part of the state’s interest in future tobacco settlement revenue, or allow him to delay for another year a payment into the Kansas Public Employees Retirement System, a payment that was supposed to have been made April 15.

The third option, if lawmakers choose to do nothing, would be to impose across-the-board allotment cuts ranging from 3 to 5 percent to most state agencies and programs, including K-12 education.

After the vote on the tax bill, House and Senate budget negotiators met to hammer out a final budget deal. Late Friday evening, House negotiators offered several compromise positions, including one that allows the governor to delay the $92 million repayment to KPERS, but would repay that money using any excess tobacco money the state receives that doesn’t otherwise go toward children’s programs, plus any excess general fund revenues the state receives above the official revenue estimates.

House budget committee chairman Rep. Ron Ryckman, Jr., R-Olathe, also offered language that would hold K-12 education harmless from any mid-year budget cuts that the governor may need to order.

Senate negotiators are expected to respond to that offer when the budget conference committee meets again Saturday morning.

Some lawmakers think they can wrap the session up and adjourn later Saturday, if they can reach agreement on a budget plan and a few other minor bills.