Denning's Tax Increases
Denning’s Tax Increase Proposals
Finding the means to erase a $600 million budget deficit, Kansas legislators and their political allies are proposing new revenue sources. One such effort was featured in Steve Rose’s weekly conservative viewpoint column in the Sunday, April 19th Kansas City Star. http://www.kansascity.com/opinion/opn-columns-blogs/steve-rose/article18804195.html Rose reported on his conversation with Senator Jim Denning (Overland Park Republican), a first-termer in the Senate and one-term former House member. Denning’s list of budget fixes (complete with his own revenue estimates) are eleven in number. Due to his position as a budget conference committee member and vice-chairman of the Senate Ways and Means Committee, Rose thinks his ideas should get serious consideration from his partners in legislative malfeasance. Let’s look at his ideas that directly affect taxpayers.
Fix the LLC exemption “Loophole”
Denning (per Rose) claims the current law does not reflect legislative intent, which was always to tax business owners wages and allow only “non-wage” income to pass through tax-free. Unfortunately, there are no prior statements of intent to support this claim. Nor was the “loophole” hard to find, being touted by the Governor as a job creator. Business owners decided they didn’t need taxable wage income reported on a W-2 and were more than happy to accept tax-free dividend income reported on a 1099. Actually, the number of such tax savers was explained as being larger than anticipated, which destroys the intent argument. The unintended “loophole” claim is a case of buyer’s remorse or face-saving on the part of Denning and others who share this viewpoint. But, if reversing it helps stop the hemorrhaging of revenue, give Denning credit for raising the issue and voicing his misgivings for fellow legislators to chime in on. The suggested deficit reduction to be obtained is estimated at $110 million, but who knows how that will work out, if this is passed and approved.
Raise the Sales Tax back to 6.3% from 6.15%
Legislative justification for this sales tax bump will be that it is not really a tax increase. Rather, it is merely the restoration of a tax rate that had been previously set as an emergency measure and is needed again. The Republicans in charge will take credit for giving Kansans a two year sales tax holiday of 0.15% and will suggest that, as soon as the Brownback/Laffer tax cut plan works, they’ll reverse it. Don’t hold your breath. The major objection to this sales tax increase is its regressive impact on lower income residents. However, I’m having trouble objecting too strenuously to the small sales tax increase, when city governments are quick to add a penny or more to the sales tax for improvement districts. The suggested deficit reduction from this move is estimated at $55 million, but who knows how that will work out, if it is passed and approved.
Raise the Gasoline Tax by 5 Cents per Gallon
Kansas presently collects 24 cents per gallon on gasoline sales. Raising it by 5 cents per gallon would still keep it below the national average of state gasoline taxes of 30.1 cents per gallon. One problem with this idea is that the increase, if applied to a general revenue shortage, will not help construct and maintain highways. It will only allow the state highway funds to be further pillaged. Also, gasoline taxes like other consumption taxes are regressive. A savings grace is the user charge aspect of a per gallon tax, provided it is used only for highways. Denning says this could reduce the deficit by $80 million, although others have set the take at $100 million.
Itemized Deduction Reduction
A 50% slashing of the amount of deductions to offset taxable income already scheduled for January 1, 2017, and could generate more revenue for the fiscal year beginning on July 1, 2015, if implemented now. Despite creating a special income tax calculation for half a year, it would be relatively simple to implement with low cost. No matter how this is explained, it is a tax increase, which it isn’t if the income tax should someday reach zero, as planned by Brownback. The 50% cut in deductions was also planned to accompany a further reduction in the income tax rates. Upper income people are already limited in federal income tax deductions which carries over to state returns. The rate reduction for upper income tax payers could more than offset a reduced deduction, but would not have the same effect for lower and middle income filers. This change is guessed at picking up $50 million toward a balanced budget.
Given the incentive of forgiveness of penalties and interest, it is estimated that a one-time bump in income tax receipts could be achieved from “late filers” who are enticed to join the ranks of taxpaying citizens. This is in the temporary fix category and is not a solid budgeting tool. It should be used only to add to a rainy day fund or budget surplus, not as an annual source of income. This might bring in $30 million, according to Denning’s sources.
Rose writes, “Denning does see an opportunity to raise $5 million to $10 million in taxes on e-cigarettes.” My initial reaction is amazement that this tax hasn’t already been enacted. Perhaps, the legislators have been spending too much time on social issues and not keeping a sound fiscal house. Wow, that’s an understatement. The e-cigarette tax is estimated at $10 million.
The end result of Denning’s six tax increase proposals is still short of the estimated infusion of revenue needed to balance the budget. It provides no restoration of the surplus mandated by state law. It will probably not be as well received as, according to Rose, Denning hopes it will be. Let’s just hope that Rose’s parenthetical comment, “I would add that critics who call for (tax cut) repeal are out of touch with reality and are wasting their energy.” is the outlier and eventually sanity, prudence and stewardship will return to Topeka and prevail.