Tax conference committees will go back to the negotiating table Friday after the House resoundingly rejected a plan that suspended Gov. Sam Brownback’s “glide path to zero” income tax but did not substantially roll back a business tax exemption included in the 2012 tax-cut law.
The bill that made it to the House floor on Day 105 of the traditionally 90-day session relied largely on sales tax increases for the $406 million in new tax revenue needed to finish closing an almost $800 million structural deficit in the budget for the fiscal year that begins July 1.
Furloughs loom if the Legislature does not approve a budget by Saturday night, but that was not enough motivation to sway House members who voted 108-3 against the plan.
Thursday’s proposal froze individual income tax rates at present levels through 2018 before allowing them to drop slightly in 2019 and 2020. The tax cut law calls for the bottom income tax rate to drop from the current 2.7 percent to 2.4 percent in 2016 and 2.3 percent in 2017. It lowers the top rate from the current 4.6 percent to 3.9 percent in 2018.
House and Senate tax negotiators on the conference committee agreed Thursday afternoon to reduce the bottom rate to 2.3 percent but not until 2019. Their plan also would have lowered the top rate to 4.3 percent in 2019, stopping short of the 3.9 percent called for in the 2012 law.
“The (tax reduction) formula is repealed in our offer,” said Rep. Marvin Kleeb, an Overland Park Republican and leader of the House negotiating team.
Repealing the tax reduction formula is necessary, Kleeb said, to ensure the state has sufficient revenue to fund education, Medicaid and the public employees’ retirement system in future years. Allowing the income tax reductions to continue as scheduled, Kleeb said, would force lawmakers to approve large sales tax increases to keep state government operating.
“It’s a trade-off,” he said. “Do we want to raise sales tax rates to 7 percent to keep driving down income tax rates?”
For most House members, Kleeb said, the answer is “no.”
Even so, Kleeb and other Republican leaders say some level of sales tax increase will be necessary to close a remaining gap of approximately $400 million in the state’s 2016 operating budget.
The plan defeated by the House would have raised the state sales tax from 6.15 percent to 6.65 percent, starting July 1. On Jan. 1, 2016, the sales tax on groceries would have dropped to 5.9 percent.
Lowering the food sales tax has been a focus for a coalition of grocers, charitable organizations and health groups. They note that Kansas is one of only 14 states that currently levy a sales tax on groceries and say lowering the tax would provide more incentive to consume fresh produce.
The plan that went to the House floor Thursday also included a 50-cent per-pack increase in the cigarette tax, which was negotiated down from the House’s initial proposal of 65 cents. Both figures were less than half what public health advocates had pushed for.
Sen. Les Donovan, the Senate’s top tax negotiator, also gave in on his proposal to tax electronic cigarettes. Donovan said that after talking with industry stakeholders and the Kansas Department of Revenue, he decided there was not enough consensus on how to effectively tax the relatively new, largely unregulated products.
But he said he’s only giving up on the idea temporarily.
“Eventually we’re going to tax e-cigarettes,” Donovan said. “It’s going to be a much bigger part of the smoking arena.”
The tax conference committee is scheduled to continue its work at 11 a.m. today.