Tax Break

Canary in the tax code: Will Kansas give up tax breaks for lower rates?

January 26, 2012

Kansas governor Sam Brownback

U.S. tax experts agree Congress won’t see a tax reform plan ahead of the 2012 election, but Kansas lawmakers already have.

The tax reform blueprint, lowering rates but broadening the base of income that’s taxed by eliminating current tax breaks, is playing out in the state capital Topeka. The legislature convened on Monday and will debate Republican Governor Sam Brownback’s new tax overhaul plan.

Brownback’s plan would condense the state’s five tax brackets to just two –  4.9 percent and 3 percent – eliminating three additional rates currently in place, including the current top rates of 6.45 percent and 6.25 percent.

Businesses organized as limited liability corporations (LLCs), S-corporations or sole proprietorships would be exempt from income taxes entirely. About 191,000 taxpayers would get this tax break, according to the governor’s budget.

But the governor’s plan wades into treacherous waters on tax breaks. Almost all state tax credits and deductions would be eliminated under his proposal, including the mortgage interest deduction, earned income credit, charitable and local tax deductions.

The plan has quickly drawn fire from special interests. The Kansas Action for Children estimated 20 percent of Kansas taxpayers would pay 2.2 percent more each year under the proposal, or about $242 a year.

Even the chairman of the Kansas legislature’s House Education Committee, Clay Aurand, a fellow Republican, said he was skeptical the tax reform can be accomplished this year.

The liberal-leaning Center on Budget and Policy Priorities listed several challenges ahead for the governor’s plan in an analysis on Tuesday.

“Governor Brownback’s proposal for dramatic changes to Kansas’ income tax includes a highly problematic provision that would eliminate all taxes on the profits of certain types of corporations and similar non-corporate business entities.  The provision would benefit many large corporations and investment vehicles.  At the same time, the proposal would cost the state, at a minimum, $266 million or more in annual tax revenue that the state otherwise could be using to strengthen its economy.”

Just as states compete for jobs, the U.S. faces international economic competition from countries offering businesses lucrative tax incentives to move jobs abroad. That prompted U.S. House of Representatives Ways and Means Committee chairman David Camp to introduce a tax reform discussion draft that drops corporate and individual rates to 25 percent.

Brownback’s plan may test whether voters are willing to give up tax breaks in exchange for lower rates.

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