Kansas House Shoots Down Latest Tax Reform Bill

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By Christopher Brown

The Kansas Legislature rejected once again legislation that would have rolled back most of Gov. Sam Brownback’s (R) 2012 tax cut package, including a controversial exemption for passthrough income that by itself has cost the cash-strapped state around $230 million each year.

The bill, a conference committee version of S.B. 30, was rejected May 22 on a 53 to 68 vote, with ‘No’ votes drawn both from supporters of the 2012 cuts who oppose tax increases and the most vehement opponents of the tax cuts who rejected S.B. 30 as not going far enough.

The result is an ongoing stalemate on tax policy that has become the defining feature of Kansas’ 2017 session. The way forward isn’t at all clear, according to Rep. Steven Johnson (R), chairman of the House Taxation Committee.

Moving the Goal Posts

“This bill provided an increase of 30 percent over the bill we passed earlier in the session, H.B. 2178, from $450 million to $600 million,” Johnson told Bloomberg BNA. “And yet many of my Democrat colleagues said it wasn’t big enough. It feels to me like the goal posts have moved more than I estimated that they could in that time.”

Brownback vetoed H.B. 2178 on Feb. 22, and then died when the Senate narrowly sustained the veto after the House voted to override.

Johnson said the Democrats will have to show a willingness to yield on some of their second-order priorities to prevent a weakening of support among moderate Republicans for a S.B. 30-style tax package. This could mean looking beyond an income tax increase for additional revenue to sales taxes, tobacco taxes, or a possible surcharge on utility bills.

“The Democrats want the revenue from a progressive income tax increase, rather than taxes they see as hitting the ordinary taxpayer,” he said. “But no one gets everything in a tax package, and perhaps the best you can shoot for is that everyone be equally unhappy.”

Rep. Jim Ward (D), the House minority leader, didn’t immediately respond to a request for comment.

Bill Details

Like previous tax bills debated during the 2017 session, S.B. 30 would repeal the exemption for passthrough income beginning in tax year 2017 and would increase income tax rates.

For 2017, the rates would move from 2.70 percent and 4.60 percent, with a $30,000 bracket threshold, to 2.90 percent, 4.90 percent, and 5.20 percent, with thresholds at $30,000 and $60,000.

For 2018 and thereafter, the rates would move to 3.10 percent, 5.25 percent, and 5.70 percent, keeping the same bracket thresholds.

The bill would also make a variety of other changes that have been included in previous proposals, including restoring the deductibility of medical expenses, allowing certain non-wage business losses to be claimed in conformity with federal treatment, reducing the low-income exclusion threshold, and eliminating future planned reductions in income tax rates.

A new feature of S.B. 30 would be a one-year moratorium on sales tax revenue bonds used to fund commercial, entertainment, and tourism developments.

$590 Million

According to information from the Department of Revenue, the bill would increase state revenue by $590 million in fiscal year 2018, rising to $645 million in 2022.

That amount of revenue would be enough to pay the state’s bills through the next two years and provide additional funding for K-12 education as called for by a recent ruling from the Kansas Supreme Court, Johnson said.

Members of the education finance committees in both chambers haven’t arrived at a final figure for new school funding, but Johnson said he’s confident it will be around $150 million for the first year and $300 million for the second. As to whether that will be enough to satisfy the supreme court, Johnson said that “if the court looks at what we’ve done and decides to give us new instructions, we’ll have to take that up at that time.”

But trying to push through a bill generating more revenue than S.B. 30 would come at a real risk of losing Republican support, Johnson said. “That kind of increase would be tough for me to agree to,” he said. “I had a hard enough time with what’s in S.B. 30.”

Doomed in Advance

In a Facebook statement, Rep. Sean Tarwater (R) was sharply critical of House leadership for bringing the bill to a vote.

“The largest tragedy here is that this bill was a known failure all along,” he said. “If this bill passed out of the House, it had very little chance in the Senate. If it did miraculously pass both chambers, it certainly lacked the votes to override a certain Governor’s veto. There was a lot of political capital spent tonight for a bill that was doomed from the beginning.”

Tarwater also directed fire at critics of the 2012 cuts who have been unwilling to settle for less than a complete repeal.

“We would NOT be in this budget nightmare if those legislators that championed a tax increase would have voted to reverse the loophole rather than claiming ‘it did not go far enough’ and settled for nothing at all,” he said, referring to the passthrough exemption. “I am not sure how it makes sense to choose nothing over something when you know the need is so great.”

The debate over the passthrough exemption in Kansas has taken on a new salience since the election of President Donald Trump, who is working with Republicans in Congress on a variety of tax cut proposals, including one that would tax income from passthrough entities at 25 percent, well below the proposed 33 percent top income tax rate.

To contact the reporter on this story: Christopher Brown in St. Louis at ChrisBrown@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of the conference committee report for S.B. 30 is at http://src.bna.com/o8V.

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