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TOPEKA — A House-passed bill to expand a tax incentive for businesses that create or retain jobs has been rewritten by a Senate committee to limit its cost and avoid a veto.

Sen. Karin Brownlee, R-Olathe, chairwoman of the Senate Commerce Committee, worked with the bill’s primary sponsor, Rep. Marvin Kleeb, R-Overland Park, and officials from the departments of commerce and revenue to scale back the bill, which expands the Promoting Employment Across Kansas, or PEAK, program.

Today, only out-of-state companies that relocate operations to Kansas are eligible for the incentive, which allows them to retain most the state income tax they would normally withhold from employees’ paychecks. The House version of Substitute for House Bill 2538 would have made eligible for the credit out-of-state companies that purchase but don’t move Kansas businesses and companies already located here that expand and create new jobs.

The Senate committee’s bill eliminated the benefit for out-of-state companies that purchase but don’t move Kansas businesses. In addition, the amount available to fund tax breaks for Kansas companies that expand was capped at $4.8 million a year.

Kansas Revenue Secretary Joan Wagnon said capping the amount available to expanding Kansas companies accomplished two objectives. First, it limited the cost of the bill and second, it helped ensure the Department of Commerce would grant the tax break to the most deserving applicants.

“It forces Commerce to pick the best (companies) and manage within that cap,” Wagnon said.

Tax break trade-off

The cap amount equals what Wagnon estimates will be saved by the bill’s partial repeal of the business and jobs development tax credit. Businesses in the state’s six urban counties – Douglas, Johnson, Leavenworth, Sedgwick, Shawnee and Wyandotte – would no longer be eligible for the credit, which hasn’t been very effective, according to a recent report by the Legislative Division of Post Audit.

Wagnon advocated eliminating the credit, but Brownlee and others resisted, claiming that it was more important to businesses in rural areas.

The cost of the original bill would have grown from $6.1 million in the first year to $32.8 million in year five, according to the Department of Revenue. But supporters argued that by then, other taxes being paid by the thousands of people in jobs created by the program would exceed its cost by $18 million.

Both Wagnon and Brownlee said the changes in the bill – including language that gives the commerce secretary more discretion in granting tax incentives – should come close to making it revenue neutral.

“That is a big shift,” Brownlee said. “It takes changes almost $5 million from an entitlement to something that is carefully negotiated.”

Wagnon and Gov. Mark Parkinson have said that tax breaks granted over the last 15 years have eroded the tax base and contributed to the state’s budget crisis. A sharp and sustained downturn in revenues forced the governor and lawmakers to cut approximately $1.3 billion in spending over the past two years and they’re facing a projected deficit of $450 million in the coming budget year.

Calling it “unbelievable” that lawmakers were considering additional tax breaks, Parkinson recently threatened to veto the PEAK expansion bill.

Wagnon said even though the bill is “a lot better than it was,” she isn’t ready to recommend that the governor sign it should it reach his desk.

“This bill has been a moving target,” she said. “I’m not going to recommend anything to the governor until I see it in its final form.”

And, Wagnon said, she remains nervous about making the withholding tax an economic development tool.

“We can’t give away the only tax source that’s growing,” she said.

New accountability

The Senate committee’s bill gives Kansas Inc., the state’s economic development think-tank, responsibility for evaluating the effectiveness of the PEAK expansion and other tax incentive programs. And it provides the agency with $250,000 to conduct the audits.

“I’ve been trying to do that for years,” Brownlee said.

The Post Audit report said that the Legislature should consider repealing 12 tax credits that cost the state about $122.5 million a year.