TOPEKA CAPITAL JOURNAL: Kansas flat-tax proposal finds little enthusiasm at Legislative hearing

By Celia Llopis-Jepsen
March 20, 2017

A flat-tax proposal drew little support during a hearing Monday, though it includes a partial rollback of an unpopular 2012 tax cut that lawmakers tried repealing last month.

The free-market think tank Kansas Policy Institute was the only proponent of House Bill 2385, which would have lowered taxes for individuals earning more than $15,000 by setting an across-the-board income tax rate of 3.9 percent.

“We do have concerns about those with taxable income below $15,000,” KPI cautioned, however, in its brief written testimony to the House tax committee.

For that group of lowest earners, the bill would constitute a hike from 2.7 percent. KPI suggested resolving this with a $15,000 taxable income deduction that would cancel out their tax obligations.

The Kansas Center for Economic Growth and Kansas Action for Children, meanwhile, saw H.B. 2385 as failing to fix years of ailing state revenues.

“Communities across Kansas are already struggling to fund education, infrastructure improvements, public safety, health care and transportation,” said Heidi Holliday, executive director of the Kansas Center for Economic Growth. “A flat tax is unaffordable.”

The legislation partially closes the 2012 tax exemption for limited liability companies. The owners of LLCs would pay income tax unless they employ at least one person who receives wages reported on a federal W-2 form. This provision is what prevents the bill from costing the state money overall, resulting in an estimated revenue gain instead. The Division of Budget’s fiscal summary projects it would bring in more than $100 million over the next two years.

Rep. Steven Johnson, R-Assaria, said after Monday’s hearing that he sees little appetite for the flat-tax plan.

“It certainly didn’t have traction in the meeting today,” said Johnson, who chairs the tax committee. “We would need to see support for the idea to be able to carry it forward.”

He suggested it would be possible to “go back to the drawing board” and make it work, “but there doesn’t seem to be a lot of energy behind that at the moment.”

Separately, H.B. 2385 and another bill under consideration, H.B. 2395, would scuttle one of Brownback’s signature 2012 policies — a tax reduction mechanism scheduled to kick in in 2021 and known as the “March to Zero” program to eliminate income tax.

That idea appeals to some lawmakers, but this didn’t translate to enthusiasm for the overall proposals. Rep. Jim Gartner, a Topeka Democrat, said the March to Zero repeal has appeared in other bills. A flat tax, which he opposes, simply isn’t necessary as a vehicle to achieve it.

“I think it really taxes the middle income at a disproportionate level, and not the highest wage earners,” Gartner said. “So I’m just not a fan.”

According to January 2017 data collated by the Federation of Tax Administrators, eight states have flat rates for personal income tax — Colorado, Illinois, Indiana, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah. That’s an increase of two states compared to five years earlier, according to historical data from the National Conference of State Legislatures.

This year’s personal income tax rates in the flat-tax states range from about 3 to about 5.5 percent. Another seven states don’t have personal income tax at all.

Kansas currently has the country’s only two-bracket system. Those who earn less than $15,000 a year pay 2.7 percent, and higher earners pay 4.6. Most states have more brackets.

The second bill that received a hearing Monday, H.B. 2395, would eliminate income tax for anyone earning less than $10,000. Other individuals would see $10,000 deducted from their taxable income, and would pay 5 percent on the rest.

That bill does not tackle the LLC exemption and would result in a net loss in state revenues at a time when lawmakers are looking for ways to close massive budget holes for fiscal 2018 and fiscal 2019. No one testified in favor of the bill.

A month ago Gov. Sam Brownback vetoed the Legislature’s first attempt at tax legislation this session, a package that would have raised hundreds of millions of dollars in part by overriding his 2012 tax policies. The House found enough support to overcome Brownback’s veto, but the Senate fell three votes short.

That first tax bill differed significantly from the proposals discussed on Monday. It included three tax brackets — with hikes for individuals earning more than $15,000 and steeper increases for those earning more than $50,000 — and fully closed the LLC loophole.

The governor argued the bill was bad for working Kansans, in particular those with little in the way of disposable income.

Based on 2014 data, the conference of legislatures has pegged Kansas’ per-capita personal income tax collections at $865. This compares to a national average of $975 and is lower than three of Kansas’ four neighboring states. Income tax made up 34 percent of Kansas’ total tax receipts, just below the national average of 36 percent.

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