KHI News Service

Governor signs tax cuts into law

Critics and foes of the legislation agree it will require future spending cuts

By Mike Shields, Phil Cauthon | May 22, 2012

Gov. Sam Brownback today signed into law a package of tax cuts that many supporters and most critics of the plan agree will mean deep future cuts in state spending.

Legislative analysts project the law will cost the state treasury up to $2.9 billion in foregone revenues over the next five years and put Kansas government in the hole by about $829 million come July 1, 2014.

But the governor said he was convinced the plan - key elements of which reduce or eliminate income taxes for individuals and small businesses - would spur the economy and job growth.

Core services

"We aren't going to cut people off Medicaid," he said. "We're going to fund our schools. The roads will get built."

Brownback said he didn't agree with the premise that the tax cuts would force steep reductions in state spending. Instead, he predicted "restrained" future spending that would spare cuts to core services thanks to new state revenues he expects from an energized economy.


Kansas Tax Facts

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The governor's optimism was very much at odds with the plan's critics and somewhat so with some of its biggest supporters.

"There is no feasible way that private sector growth can accommodate the price tag of this tax cut, which means our $600 million surplus will become a $2.5 billion deficit within just five years," said House Minority Leader Paul Davis, a Lawrence Democrat. "The recklessness of Gov. Brownback’s actions are sure to result in deeper cuts to our public schools, more disabled Kansans left without critical services and higher property taxes."

About half of state tax dollars are returned to local units of government to spend, mostly for public education. Local governments are disproportionately reliant on property and sales taxes. Critics of the plan the governor signed say it will shift more burden on local government. State and local taxes combined cost Kansans about 11.1 percent of personal income in fiscal 2011, a number that has only slightly fluctuated in the past five years.

10 percent cuts?

Conservative Republicans who favor smaller government said they hoped the law would force state spending cuts.

Rep. Owen Donohoe, R-Shawnee, called the tax package "the greatest thing that's ever happened to Kansas."

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Brownback signs tax cut bill despite concerns about budget impact

He said shrinking state government was long overdue and that he hoped the law would push the Legislature in that direction.

"It will hopefully force us to be more efficient. If we become more efficient, that means we provide the same if not better services to the people, and we do it at a lesser cost and save money. Why is that not a good thing?" he said.

Dave Trabert, chief executive of the conservative Kansas Policy Institute, was among those who stood behind the governor at the bill-signing ceremony.

He later told KHI News Service that if the Legislature's projections turn out to be correct, the state would need to cut spending by 10.2 percent in fiscal 2014 in order to meet the constitutional requirement of a balanced budget and have an ending balance of $450 million.

State law requires a 7.5 percent ending balance, but lawmakers in the past have routinely bypassed it. A 10 percent reduction in state spending in one year would be unprecedented, and Trabert said he didn't expect it to happen. He said his main point in describing the scenario was that it illustrated that any major spending cuts would come in the first year of the tax plan. After that, he said, spending could grow between 2.8 percent and 3.9 percent a year while still maintaining a healthy surplus.

Trabert said the 10.2 percent cuts might not be needed if the economy grows at the clip the governor expects. He also said the deficits projected by legislative researchers were "grossly overstated."

A different plan

The tax bill Brownback signed differed significantly from the one he asked the Legislature to deliver him. His initial proposal called for the income tax cuts to be largely offset by the elimination of many widely used tax credits, including the mortgage interest deduction, the Earned Income Tax Credit and the credit for child and dependent care costs.


New Tax Law

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His plan drew session-long opposition from advocates for children and the poor, who said it would benefit rich Kansans at the expense of low-income workers and their families. The bill the governor signed also was criticized by the advocates.

“The tax bill signed into law today by Gov. Sam Brownback will have devastating consequences for Kansas children and families," said Shannon Cotsoradis, chief executive of Kansas Action for Children. She said the bill was "irresponsible and compromises the state’s potential for growth and prosperity.”

The governor's initial tax plan also would have kept a 1-cent state sales tax increase put in place by the Legislature in 2010 after state revenues plummeted because of the recession. That increase is scheduled to lapse in 2013.

The tax law the governor signed will repeal the sales tax increase in keeping with the Legislature's original schedule.

The governor said he would have preferred his initial tax proposal because it would have offset the income tax cuts with other tax increases. But he said he welcomed what the Legislature sent him and will make it work.

Breaks for business

The new law will collapse the state's current three income tax brackets to two. The current top rate of 6.45 percent will drop to 4.9 percent in 2013. The bottom rate will drop from 3.5 percent to 3 percent.

It also will exempt from income tax the non-wage earnings of sole proprietorships, limited liability and so-called Subchapter-S corporations.

State revenue officials said about 190,000 small business would benefit as a result. That business exemption is scheduled to occur in phases with the first $100,000 in earnings exempt in 2013 and 2014; the first $250,000 exempt in 2015 and 2016 and all earnings exempt in 2017 and beyond.

Revenue Secretary Nick Jordan said the exemption could only be used once per year per taxpayer. In other words, a business person participating in multiple sole proprietorships or LLCs could only exempt the earnings from one of the businesses, not all of them.

(A spokesperson for the Department of Revenue later said Jordan "may have misspoken" and that the exemption would not be limited to one use per year but would apply to all LLCs, sole proprietorships and Subchapter-S corporations.)

Those in attendance during the tax-cut bill signing ceremony included Gov. Brownback's Cabinet, legislators, and business leaders.

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Three small-business owners attended the bill-signing event, which mostly included Brownback Cabinet members and a handful of conservative legislators. Also present was Derrick Sontag, who heads Americans for Prosperity-Kansas, the state's most active anti-tax group.

Patti Bossert, founder and chief executive of a Topeka temp agency, said she expected to add two new full-time workers to her current staff of 22 thanks to the new law. She said her agency works with 450 temporary workers and will probably add 35 to 45 temps as a result of the measure.

Petition drive

Opponents of the bill over the weekend began a petition drive urging the governor to veto the tax plan, which he had days before first signaled his intention to sign. He repeated his pledge to sign the bill publicly at least twice as legislators struggled through the weekend to complete the legislative session.

Organizers said they started the protest petition Saturday morning after complaints began appearing on Twitter saying that people were unable to leave voicemail messages with the Governor’s Office.

Brownback spokeswoman Sherriene Jones-Sontag said upgrades to the phone system that began earlier this year had interrupted voicemail access to 877-KSWORKS, the constituent's services number, a glitch that was discovered Saturday.

"The phone techs were able to fix the voicemail issue by about 3:45 p.m. on Saturday and Kansans were able to leave messages when they called the 877 number," Jones-Sontag wrote in an email.

The volume of calls was as high as it has ever been over a weekend, acknowledged constituent services representative B.J. McClelland, before referring questions about the calls to the governor's media relations office. Jones-Sontag did not say how many calls were received for or against the tax bill, saying only that they were outnumbered five-to-one by calls about a controversial anti-Sharia bill approved by the Legislature in its final days.

CORRECTION: An earlier version of this story incorrectly stated that a taxpayer with a sole proprietorship, or interest in an LLC or Subchapter-S corporation, could only exempt non-wage income once per business entity per year. According to the Kansas Department of Revenue, the exemption could be used for unlimited multiple enterprises.

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