Thursday, May 16, 2013

Movement on Taxes and Budget

For the first time in the week-old 2013 veto session, a compromise proposal on tax policy was made by the Kansas House.

The proposal offered in the tax conference committee yesterday would lower the state sales tax rate from 6.3 percent to 6 percent on July 1, rather than dropping to 5.7 percent as scheduled under current law.  It would also "take back" part of the income tax cuts passed last session by limiting income tax deductions, which would phase down over the next five years.  Both of these steps would raise state revenue compared to current law.  The plan would would also includes further income tax rate reductions sought by Governor Brownback and the Senate, and partially restore the food sales tax rebate, a program favored by Democrats, reducing state revenues.

The net impact of the plan would be to keep state general fund ending balances above the statutory target of 7.5% through Fiscal Year 2016, including on the Governor's proposal to avoid K-12 education state aid cuts in the next two years.  It would also likely allow restoration at least part of the higher education cuts in the budgets passed earlier this session (4 percent by the House, 2 percent by the Senate), which the Governor opposes.

However, assuming a 5 percent baseline growth in state income tax revenue and a 3.75 percent growth in sales tax revenue, the state ending balance would drop to nearly zero in Fiscal Year 2018, as a result of deeper income tax rate cuts in 2017 and 2018..

The Senate is expected to respond to the proposal in a tax conference committee later today.  In addition, the budget conference committee is scheduled to meet at 1:30, when the House could move toward the Senate position based on its new offer.

However, it is unclear whether the Senate, which wants to keep the sales tax rate at 6.3%, will accept the House proposal, or whether the full House will accept the plan offered by its leadership.  Virtually all Democrats and many House Republicans say they are committed to allowing the full one-cent sales tax rate adopted three years ago to expire as scheduled.

The Senate is scheduled to meet today at 10:30 a.m. and the House at 2:00 p.m. Neither chamber has scheduled bills for debate on general orders, but conference committee reports could be considered.

Here are the details of the House tax offer, courtesy of the Kansas Economic Progress Council:

Here’s a quick update on legislative activity Wednesday concerning taxes from the Kansas Economic Progress Council

The state sales tax due to drop by 0.6 cents would only drop to 0.3 cents.  This would put the state sales tax at an even 6 percent.
Partial restoration of the food sales tax rebate program (worth about $20 million) is offered.
Over a five year period, all itemized tax deductions would be reduced (the so-called haircut) by the following percentages:
2013 – 24%
2014 – 35%
2015 – 40%
2016 – 50%
2017 – 60%
No deductions would be allowed for gaming losses, beginning in 2013.
Income tax rates would be reduced as well in the future
The top rates would be
4.9 % in 2013 - 2014
4.8% in 2015 – 2016
3.8% in 2017 – 2018
The bottom rates would be
3.0 % in 2013
2.7% in 2014 - 2015
2.25% in 2016
2.1% in 2017 - 2018
The Standard Deduction for Head of Household would be $5,000 and Married Filing Jointly at $6,500 in 2013 - 2018
A complicated formula for income tax reductions would kick in starting in 2019 when revenues come into the state over 2 percent.
A state general fund profile prepared by legislative staff shows the plan results in only a 0.2 percent ending balance in FY 2018.  That means the state would only have $16.3 million in the bank.

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