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Attempts by Kansas lawmakers to craft a compromise tax reform bill that would raise additional revenue and address a structural budget imbalance remained mired in stalemate nearing the end of the first week of the Legislature’s veto session.
A conference committee composed of members of each chamber did its part to come up with a compromise, putting together two separate bills earlier this week that would have raised income tax rates, eliminated a controversial exemption for passthrough income and raised state revenue by more than $1 billion over the next two years.
But neither H.B. 2067 nor S.B. 30, could muster the support at this point in the veto session to pass even a single chamber—nor the level of support needed to overcome a likely veto from Gov. Sam Brownback (R), whose 2012 tax-cut package is in the crosshairs during this debate. Specifically, legislators want to end the passthrough exemption that has been touted as a model for federal tax reform.
Although the bills have their differences, they are alike in one respect, according to Rep. Steven Johnson (R), the chairman of the House Taxation Committee: they raise too much revenue for conservatives who argue that spending cuts should play a bigger role in solving the state’s budget problems, and they raise too little for moderates and Democrats who say the numbers under discussion are far from adequate to the state’s needs, especially when a recent Supreme Court ruling requiring the Legislature to increase funding for K-12 schools is factored in.
“It looks to me like we’re about $150 million above what my conservative members say they can vote for, and about $150 million below the right amount for those who think we need more,” Johnson told Bloomberg BNA earlier this week. “I guess we’re pretty close to making everyone equally unhappy, the equal point of pain for all concerned. So our task is to work the numbers, look at the budget closely again, and see if we can find a path forward that will give us the votes we need.”
Johnson told Bloomberg BNA May 4 that his goal now is to “bring people back together” after a few days of “pushing forward plans that increased our divisions.”
Brownback has also entered the negotiations with a two-bracket plan that could be worth looking into, Johnson said. “But we’re still back at the drawing board,” he said.
The first bill to emerge from the conference committee was (H.B. 2067), which proposed a system of three income tax brackets with rates set at 2.7 percent, 5.25 percent and 5.45 percent. Those rates would take effect in 2018, but the bill would also have created a phase-in period in the second half of 2017 with slightly lower rates.
Current law provides for a two-bracket system with rates of 2.7 percent and 4.6 percent.
Other provisions of the bill included allowing taxpayers to begin claiming certain non-wage business-income losses in conformity with federal treatment, restoring the deductibility of medical expenses and adjusting the low-income exclusion threshold.
The bill also included two other major items on the wish lists of tax reformers: elimination of the exemption for passthrough income and elimination of the so-called path to zero, a series of planned future decreases in the state’s income tax rates that would eventually eliminate the income tax altogether.
The package was enough to win applause from the Kansas Center for Economic Growth, an advocacy group that has been pushing for a rollback of the 2012 tax cuts for several years, as a “great starting point.” But the bill’s projected annual revenue yield of around $450 million was not enough, according to Heidi Holliday, KCEG’s executive director.
H.B. 2067 “included essential components for comprehensive tax reform,” Holliday after the Senate pulled back from a scheduled debate on the bill May 2. “Unfortunately, it fell far short of generating the revenue Kansas needs to pay its basic bills. Let’s get this right.”
The conference committee went back the drawing board that night and put together S.B. 30, which attempted to at least partly answer the objections of those seeking higher revenue by setting the income tax rates in a three-tier system at 3 percent, 5.25 percent and 5.6 percent. The projected annual revenue increase from S.B. 30 was around $550 million, according to a bill summary provided by the Legislative Research Department.
The bill was otherwise quite similar to H.B. 2067, but the changes weren’t enough to win the support of Democrats, whose votes would be necessary to any eventual veto-proof margin for the bill. They said they would only support the measure if it included enough revenue to address both the state’s long-term structural deficit and its need for increased education funding.
Legislative committees in charge of rewriting the state’s school-funding formula to meet the Supreme Court’s objections have yet to settle on a funding amount. This is complicating the tax debate, Johnson said.
“We’re now running into questions of timing as well as of substance,” Johnson told Bloomberg BNA May 3 after the House declined to begin debate S.B. 30. “The Democrats want to wait until the issue of school funding is resolved, so as not to have to vote a second time at the end of the session on additional revenue raisers.”
“They’d rather cut the tail off the dog all at once, than a little at a time,” he said.
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 email@example.com
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