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On January 1, 2017, the KHI News Service became part of KCUR public radio’s new initiative, the Kansas News Service. The Kansas News Service will continue to cover health policy news and broaden its scope to include education and politics. All stories produced by the former KHI News Service are archived here. Stories and photos may be republished at no cost with proper attribution and a link back to KHI.org.

Business tax exemption targeted for repeal in wrap-up session

But election year politics and depth of state’s budget problems could derail effort

By Jim McLean | April 26, 2016

An effort to roll back a controversial business tax exemption is among the budget-balancing proposals that lawmakers will take up in the final weeks of the 2016 legislative session.

Several key Republicans, including many self-described conservatives who voted for Gov. Sam Brownback’s income tax cuts in 2012, are openly supporting bills to either reduce or eliminate the exemption as legislators return Wednesday to wrap up the session.

Photo by Jim McLean/KHI News Service Sen. Forrest Knox, a Republican from Altoona, spoke with constituents last week at a meeting in Gridley. During the meeting, Knox said he voted for tax cuts in 2012 believing that owners of limited liability companies and sole proprietorships still would be required to pay some taxes on their pass-through or non-salary income.

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A trio of Senate conservatives, Jim Denning and Greg Smith, both from Overland Park, and Jeff King, from Independence, are sponsoring a bill that would partially roll back the exemption.

And Sen. Forrest Knox, a conservative Republican from Altoona, said recently that he too “is open” to either modifying or repealing the exemption.

During a recent meeting with constituents, Knox said he voted for the tax cuts believing that owners of limited liability companies and sole proprietorships still would be required to pay some taxes on their pass-through or non-salary income.

“That was my understanding, but it turned out that wasn’t the law,” Knox said.

In fact, the law exempted more than 330,000 business owners and farmers from state income taxes, reducing collections by approximately $250 million a year.

Opposition on two fronts

An effort to repeal the business exemption spearheaded by Rep. Mark Hutton, a Wichita Republican, failed in the closing weeks of the 2015 session. With more support from conservative Republicans, it appeared this year’s repeal bill stood a better chance.

But that might not be the case. For varying reasons, opposition remains strong.

[ Listen to the radio version of this story on Kansas Public Radio. ]

Brownback and many of the Legislature’s conservative Republican leaders are opposed to making any changes in the tax cut law, which they insist is making Kansas more attractive to businesses and job creators.

Last week Brownback dispelled rumors that he was open to a partial rollback of the business exemption, telling the Wichita Eagle that he believes a “tax increase” of any kind would worsen the economic trends depressing key segments of the Kansas economy.

“We’ve got a global commodity falloff,” Brownback said. “You’ve got slow growth rates in the country. And to exacerbate that with a tax increase I don’t think is the right way to go.”

Facing opposition from the governor and legislative leaders, the lawmakers pushing the bills to modify or repeal the exemption will need support from Democrats and moderate Republicans.

Photo by KHI News Service File Photo Sen. Laura Kelly, a Democrat from Topeka, says she and other legislators “are not interested in another short-term patch” for the state’s budget situation.

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But getting them on board also is proving difficult. 

Sen. Laura Kelly, from Topeka, is the top Democrat on the Senate’s budget-writing committee. She rejects out of hand a bill scheduled for a hearing at 9 a.m. Thursday in the Senate Committee on Assessment and Taxation that would partially roll back the exemption.

Senate Bill 508 — from Denning, Smith and King — would re-impose the tax, but only on 70 percent of a business owner’s pass-through income.

Kelly also doesn’t support a House bill that as currently written would repeal the exemption and use the proceeds to reduce the sales tax on food. She said even if it is repurposed to help balance the budget, it wouldn’t generate enough revenue to fix the problem.

“There are a number of legislators who are not interested in another short-term patch,” Kelly said.

Many moderate Republicans have similar concerns.

Rep. Tom Moxley, a Republican who owns a ranch near Council Grove, favors closing the exemption even though he is among those benefitting from it.

“I am one of those blessed by the governor who does not pay Kansas income tax,” Moxley said. “But my employees do. How fair is that? It obviously is not fair. It’s nuts.”

But like Kelly, Moxley said repealing the exemption would be another in a series of financial Band-Aids.

“The state will still be bankrupt, it will just be slightly less bankrupt,” Moxley said. “You’ll still be borrowing to pay next year’s bills.”

Both Moxley and Kelly said a more comprehensive proposal is needed — one that rolls back the tax cuts and restores balance to the state’s tax system.

“We need a broader tax structure,” Moxley said. “We need everybody carrying their weight.”

Election-year politics

Many lawmakers, Kelly said, are not willing to put themselves on the line for a tax increase that doesn’t fix the problem and which if passed would likely be vetoed.

In addition, she said, Democrats and moderate Republicans who voted against the tax cuts aren’t interested in “bailing out” lawmakers who supported them. She views the current repeal effort as an attempt by tax cut supporters to mollify voters concerned about the toll that persistent revenue shortfalls are taking on education, highways and social programs.

“A number of the proposals that we’re seeing are knee-jerk reactions to the governor’s poor polling,” she said. “But I think there has been enough damage done over a long enough period of time that people will recognize political showmanship when they see it.”

“I am one of those blessed by the governor who does not pay Kansas income tax. But my employees do. How fair is that? It obviously is not fair. It’s nuts.”

- Rep. Tom Moxley, a Republican who owns a ranch near Council Grove

Kansas started the 2014 budget year, the first full year of the tax cuts, with $700 million in reserves. Revenue shortfalls the following year forced the governor and lawmakers to use all of that cash and resort to a series of revenue transfers that included taking more money from the state highway program to balance the budget.

Lawmakers then ended the 2015 session by passing large increases in sales and cigarette taxes to bolster revenues and stabilize the budget through 2016.

But the shortfalls continued. And now the governor and the Legislature must find a way to handle a $290 million projected shortfall.

Repealing the business tax exemption could be a part of the solution. But Moxley and others believe it is more likely that the Legislature will make quick work of the wrap-up session and force Brownback to balance the budget.

If that happens, Moxley said, he expects the governor will implement the second of three budget-balancing options he proposed last week. It would take another $185 million from the highway program — forcing a two-year delay in major projects — cut $34 million from state university budgets and delay to 2018 a $99 million payment scheduled to be made this year to the Kansas Public Employees Retirement System.