Christopher Brown
February 21, 2017

The Kansas Senate passed a bill that would roll back Gov. Sam Brownback’s (R) controversial 2012 tax cut package.

The bill, a substitute for H.B. 2178, would eliminate the income tax exemption for passthrough income, restore a third income tax bracket for higher-income taxpayers and end future scheduled rate reductions that were part of Brownback’s “march to zero” plan to do away with the income tax altogether.

The Feb. 17 action, which followed House approval earlier in the week, sets up a possible veto showdown between the conservative governor and a Republican-controlled Legislature that received an infusion of more moderate and tax-friendly voices in the 2016 general election.

“The significance of what happened in Kansas today simply cannot be overstated. Lawmakers on both sides of the aisle cast aside partisanship and politics, came together, and put our state on the path to fiscal sanity. This legislation is not perfect—there is more work to do. But ending the Brownback tax experiment and replacing it with commonsense, structural reform was an essential first step. That’s what this bill achieves,” Heidi Holliday, executive director of the Kansas Center for Economic Growth, told Bloomberg BNA.

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 a proposal that would tax income from passthrough entities at 25 percent, well below the proposed 33 percent top income tax rate.

Narrow Margin

H.B. 2178 passed the Senate by a vote of 22–18, a much narrower margin than it achieved in the House Feb. 15, where it was approved 76–48. That narrow margin in the Senate renders doubtful the hope that a broad show of support in the Legislature might convince Brownback to drop his previously expressed opposition and not veto the bill.

The vote came one day after the Senate rejected a more aggressive rollback, S.B. 188, that would also have ended the passthrough exemption and themarch to zero, but would have created a third bracket for higher income taxpayers with a higher rate and made other adjustments that would have produced additional revenue.

According to information from the Department of Revenue, H.B. 2178 would produce around $590 million in fiscal year 2018, while S.B. 188 would have produced $702 million.

Melika Willoughby, Brownback’s spokeswoman, said in a statement released just after the Senate approval of H.B. 2178 that “as with all legislation, Governor Brownback will review the bill closely once he receives it.”

Veto Uncertainty

Eric Stafford, a spokesman for the Kansas Chamber of Commerce, expressed the disappointment of those who have defended Brownback’s tax cuts. “It’s unfortunate the Senate chose to pass nearly a $600 million retroactive tax increase on the small business community and middle class Kansans,” he told Bloomberg BNA.

Stafford said the chamber hasn’t received any indication of Brownback’s intentions. “Obviously, our preference is that he veto the bill.”

Bernie Koch, executive director of the Kansas Economic Progress Council, said “I think today’s vote is the result of Kansans rejecting the income tax cuts and the harm they have done to education, transportation and public services. They expressed that rejection in the 2016 primary and general elections, and the people they elected have taken that message to heart.”

Koch told Bloomberg BNA he was uncertain as to Brownback’s likely course of action, which includes the rumored possibility that he could let the bill become law without his signature.

“However, I would like to hear his rationale for that,” he said. “I think he would have a hard time after his long-time defense of the 2012 income tax cuts.”

Haley Pollock, a spokeswoman for Kansas Action for Children, told Bloomberg BNA that Brownback’s need to cobble together votes to fix the state’s $350 million budget gap for this year may provide all the justification he needs to let the bill become law.

“He has criticized the bill but did not explicitly say he will veto,” she said. “Kansas is set to run out of money next month, so the Governor needs 21 and 63 votes for a budget, and he needs them soon. The Legislature demonstrated this week that he probably can’t get there without first allowing comprehensive tax reform, so he certainly has an incentive to let this bill become law without his signature.”

Show His Hand

Koch also addressed why proponents chose the parliamentary rationale for proceeding directly to the governor with H.B. 2178, rather than amending the bill and forcing it into a conference committee, where the governor could have been made a party to negotiations over its final shape. The path chosen may have been part of an attempt to force Brownback to show his hand quickly, as well as to make a political point, Koch said.

“I think they wanted to get it to the Governor as fast as they could so they can see what he will do,” Koch said. “They might have wanted to be on the record with a vote opposing the Governor, because that’s what many were elected to do.”

Next week is the “turnaround,” the halfway point of the session, which will trigger a 10-day break between Feb. 24 and March 6, Koch said. “They might have wanted some sort of indication from the Governor before the break so they can digest where to go the second half of the session,” he said.

Read more from the Bloomberg BNA here.

ClayBLOOMBERG BNA: Kansas lawmakers ax tax exemption for passthroughs