Bryan Lowry
April 28, 2016

Three Republican lawmakers pushed to put more than 330,000 Kansas business owners back on the state’s income tax rolls Thursday as a way to fix the state’s budget shortfall.

SB 508, which was reviewed by the Senate Tax Committee, would bring in an estimated $170.6 million in fiscal year 2017, which starts in July, by taxing 70 percent of business owners’ income.

The bill faced strong opposition from business groups, who warned that it would complicate the state’s tax code and hurt small businesses.

Democrats, who have long called for a rollback of the tax exemption, dismissed the bill as an election-year stunt by Republican lawmakers. They said it does not go far enough and wouldn’t fully solve the state’s budget problems.

Supporters say the bill would restore fairness to the state’s tax code and help Kansas address its $290 million budget hole.

“We can’t wait on the creation of a tax utopia before we start addressing fairness problems we can solve,” said Senate Vice President Jeff King, R-Independence, one of the bill’s chief architects.

We can’t wait on the creation of a tax utopia before we start addressing fairness problems we can solve.

Senate Vice President Jeff King, R-Independence

Sen. Jim Denning, R-Overland Park, said many of the businesses that benefit from the tax break are single-person firms with no employees and that the policy, championed by Gov. Sam Brownback, had failed to accomplish its goal of spurring employment growth.

He said it made no sense to exempt all of business owners’ income since everyone consumes government services. “We let 330,000 folks have a free ride,” he said.

King, Denning and Sen. Greg Smith, R-Overland Park, contended that the 2012 tax bill was not intended to exempt all of business owners’ income and said this bill restores legislative intent.

Bill would take effect in July

The bill would take effect in July, meaning that business owners would pay no taxes on their income for the first half of 2016, but face taxes for the second half of the year. It would still leave 30 percent of business owners’ income untaxed.

Opponents said this would lead to a lot of confusion.

Jay Langley with the Kansas Society of CPAs also warned that as written, the bill would require business owners to pay taxes on their income in years where they see a profit, but prevent them from deducting losses in years when they experience a loss.

“There’s no type of equity in that structure,” Langley said.

King said language should be added to bill to clarify that businesses would be able to deduct losses.

Our members aren’t concerned about the re-election efforts by the Republican Party. They’re concerned about their keeping doors open.

Dan Murray, National Federation of Independent Businesses

Dan Murray, a lobbyist for the National Federation of Independent Businesses, said the bill would hurt small businesses at a time when the state’s economy has been sluggish.

“Our members aren’t concerned about the re-election efforts by the Republican Party,” he said. “They’re concerned about their keeping doors open.”

Business income exemption

Annie McKay, executive director of the Kansas Center for Economic Growth, said her organization supports closing the business income exemption. But she added that the state’s fiscal problems had been caused by the entirety of the 2012 tax changes, which also eliminated the top tax bracket and reduced rates across the board.

The bill does not go far enough to right the state’s finances, she said.

Sen. Tom Holland, D-Baldwin City, said the bill doesn’t actually close the business tax loophole, but “just waters down the benefit.”

Holland also said that the state’s fiscal problems are “much bigger than the LLC exemption” and that the Legislature should revisit the entire 2012 tax cuts, which he said had reduced annual revenues by more than $700 million.

“It’s an election-year conversion and it’s at the last minute,” complained Senate Minority Leader Anthony Hensley, D-Topeka.

That’s a huge if. Because I don’t believe this bill would come to the floor.

Senate Minority Leader Anthony Hensley, D-Topeka

Hensley has repeatedly called for business owners to be returned to the tax rolls. Pressed on whether he would support King’s bill if it came to the floor, he replied, “That’s a huge if. Because I don’t believe this bill would come to the floor. If it did, you know, I think I would be inclined … to support some sort of a rollback.”

Hensley said the real solution would be to change the makeup of the Legislature in November elections.

Donovan working on another bill

Sen. Les Donovan, R-Wichita, the committee’s chair, said he is crafting another bill that will address the concerns about the business income exemption. He was hesitant to give specific details.

“It’s pretty simple. … It changes the amount of the exemption and it does a couple other things,” Donovan said.

“I think it’d be a lot easier to understand,” he said. “Even CPAs will understand. Maybe even a couple of lawyers will understand it.”

Read more from Wichita Eagle here.

KendraWICHITA EAGLE: Kansas lawmakers weigh putting business owners back on income tax rolls