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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.

Revenue plan in the works for wrap-up session

Bipartisan group of lawmakers determined to restore business tax over Brownback’s objections

By | March 30, 2016

Revenue plan in the works for wrap-up session
Photo by Susie Fagan/KHI News Service When Kansas lawmakers return April 27 for their wrap-up session, they likely will face more bad news about the budget. That has contributed to waning support among Republicans for Gov. Sam Brownback’s business tax cuts.

The Kansas Statehouse is relatively quiet these days. Only the arrival of the occasional busload of school children disturbs the calm.

That will change when lawmakers return April 27 to face what is expected to be more bad news about the budget.

Legislative leaders are hoping to finish their wrap-up session in a matter of days. But many involved in the process say that could be wishful thinking given a lack of consensus on how to balance the state budget in the face of continuing revenue shortfalls.

Tax receipts were $54 million below official estimates in February, and lawmakers are bracing for more bad news this week when the March numbers are revealed. Also, Shawn Sullivan, the governor’s budget director, expects the consensus revenue estimating group to once again lower its revenue targets at a meeting on April 20.

“I would expect — and I think anybody who sees the balance sheet and the revenues coming in (would expect) — that it will be decreased further,” Sullivan said on a recent edition of Statehouse Blend, a podcast produced by Kansas City public radio station KCUR.

Rep. Steven Johnson, a Republican from Assaria and a key member of the House tax committee, said he is expecting revenue shortfalls in each of the final three months of the fiscal year: April, May and June.

“That’s what we’re hearing,” Johnson said, adding that he’s been warned to expect a total shortfall as large as $200 million by the end of this fiscal year.

“I think a number of us are saying, ‘How do we plan if we are at a negative $200 million? What do we do?’” he said. “The prudent thing is to have a plan. The further we get ahead of it, the better off we’ll be.”

Reimpose business tax?

There would be little that Republican Gov. Sam Brownback and lawmakers could do but to cut spending in the current fiscal year, which ends June 30. But they could take action to generate more revenue for the 2017 budget year, which begins July 1.

Johnson is working with several legislators on a plan to do that. It relies on a bill sponsored by Rep. Mark Hutton, a Wichita Republican, that would generate an estimated $250 million to $280 million by reimposing the tax on business income. The income of more than 330,000 business owners was exempted by the 2012 bill championed by Brownback that also lowered individual income tax rates.

Brownback and other supporters of the tax cuts argued business owners would use their tax savings to deliver a “shot of adrenaline” to the Kansas economy by creating tens of thousands of private sector jobs.

That hasn’t happened. In fact, the most recent report from the Kansas Department of Labor said the state lost more than 5,000 private sector jobs over the last year.

“I think a number of us are saying, ‘How do we plan if we are at a negative $200 million? What do we do?’ The prudent thing is to have a plan. The further we get ahead of it, the better off we’ll be.”

- Rep. Steven Johnson, a Republican from Assaria and a key member of the House tax committee

But the tax cuts have had an impact. Many believe they are the main reason for the dramatic decrease in state tax collections, which have fallen short of projections in 11 of the past 12 months.

Brownback says the stimulative power of the tax cuts has been sapped by a weak economy, and he has warned lawmakers not to tamper with his signature legislation.

“This is an economic problem, not a tax policy problem,” Brownback said in a statement shortly after the February revenue numbers were released. “These numbers reflect a declining national and regional economy.”

“I will not support or call for a tax increase on small businesses in Kansas,” he said. “My focus is on managing spending, not on raising taxes.”

In recent days, the governor also has raised questions about the official revenue estimating process that the state has long used for budgeting purposes.

Johnson said Brownback may veto any attempt to repeal the business tax exemption, but it won’t stop lawmakers from pushing the issue. If a bipartisan coalition can pass a budget plan that requires reimposition of the business tax, he said, “we would ask (the governor) to work together and find a way to let that stand.”

Sen. Les Donovan, a Wichita Republican and chairman of the Senate tax committee, has resisted attempts to revisit the 2012 tax cuts. But he said the state’s continuing budget problems may force the governor and defenders of his tax policy to compromise.

“Well, we’ll see. I can’t say any more than that,” Donovan said.

Evidence of rising tension

Donovan’s willingness to discuss revenue options is one sign, but there is other evidence that Brownback is losing support among Republicans he could once count on to defend his tax cuts.

Three Republican senators — Jim Denning and Greg Smith of Overland Park and Jeff King of Independence — have introduced a bill to repeal the business tax exemption.

“We must close the LLC (limited liability company) loophole,” Denning said. “Given the rapid deterioration of the budget, I believe we have the votes to close the loophole and send the bill to the governor.”

Evidence of rising tension between GOP lawmakers and the governor’s office also was apparent in a recent incident involving Senate President Susan Wagle. When the Wichita Republican said the state hadn’t “experienced the growth that’s necessary” to sustain its budget, Brownback’s office fired back, telling the Lawrence Journal-World that she criticized the governor because she knew the media would “reward her with positive coverage for doing so.”

If there weren’t so much at stake, Democrats might enjoy watching Republicans — who have huge majorities in both houses — fight among themselves.

But facing the prospect of additional cuts to higher education, social services and the state highway program and possible cuts in K-12 education, some Democrats are participating in the budget and revenue discussions.

Rep. Henry Helgerson, from Wichita, said Democrats want to help craft a solution but won’t support a quick fix that allows Republicans who voted for the tax cuts to sidestep the issue on the campaign trail.

“What Democrats are concerned about is that Republicans would just try to get by the election,” Helgerson said. “We want to change the direction of the state.”

Realizing there will be pressure to act quickly during the wrap-up session, Helgerson is willing to go along with plans to initially use the revenue generated by the reimposition of the business tax to fill holes in the budget. But after two years he wants to use the money to gradually buy down the statewide sales tax on food, which now is among the highest in the nation at 6.5 percent.

Thirty-five states exempt food from the sales tax. Several others tax it at something less than their full rates. Kansas is among only a handful of states that levy their full rates.

Helgerson and other Democrats also want use the budget plan to boost funding for public schools and to create a rainy day fund. And it would be nice, Helgerson said, if Republicans would agree to abandon Brownback’s effort to reduce individual income tax rates to zero over the next several years.

“The rational approach over the next five years is to first put the business tax back on,” Helgerson said. “We then have to go back to a better balance of sales tax, income tax and property taxes. And finally we need to start building a rainy day fund even if we have to go very slowly on that in the next 10 years.”

It’s unlikely that Republicans will agree to all of that. But Johnson said he and others also want a long-term solution to the state’s revenue and budget problems.

“We want to be careful not only to handle the symptom of the revenue shortfall but also the cause,” he said. “So, we’re looking at what erodes the sales tax base and what might affect the income tax base and hopefully have something more stable moving forward.”