House and Senate negotiators have reached a preliminary agreement on cutting the state’s individual income tax, including eliminating the tax on all non-wage business income by the year 2017.
It will take the staff of the Legislature until Monday to put the wording together for a final review before the Tax Conference Committee signs off on the agreement. That could mean the measure could go to a vote next week sometime.
The lengthy proposal was offered by the House and accepted with some changes by the Senate.
- There is no “trigger” or “spending limit” as proposed by the Governor or passed the House. The tax reduction would be a one-time decrease in the rates.
- Individual income taxes would be reduced and go from three brackets to two. The brackets are 3% and 4.9%, with the higher bracket kicking in at more than $30,000 of income.
- Non-wage business income would become exempt from Kansas income tax after a phase-out period. The first $100,000 of income is exempt in 2013 and 2014. The first $250,000 is exempt in 2015 and 2016. The entire non-wage income is exempt in 2017. These are businesses that pay their taxes through the individual mechanism (LLCs, Sub S, Sole Proprietors).
- Certain business loss carry forward provisions the House wanted were not included in the bill.
- The temporary one-cent sales tax would phase out as written in current law.
- The two –year severance tax exemption for new pool wells is removed from the law, except the first 100 barrels per well is exempt from the tax. The petroleum industry involved in the new drilling activity in South Central Kansas opposes this measure as a tax increase.
- Several tax credits are repealed. The Earned Income Tax Credit remains. Taxpayers would have to choose whether to take the EITC or the sales tax food rebate. Some groups oppose this as unfair to the working poor.
- Other tax credits not repealed are the IDA (Individual Development Account), historic preservation, Learning Quest, community service, and angel investor.
- Most itemized deductions are repealed with two exceptions. The mortgage interest deduction and the charitable contribution deduction are allowed only if they add up to more than the standard deduction. The Kansas standard deduction is $3,000 for individuals and $6,000 for married couples filing jointly. Note: this means property taxes would no longer be deductible.
- The LAVTR (Local Ad Valorem Tax Relief) would be funded at $45 million per year for five years, providing property tax relief for local units of government.
- House Bill 2624, which was vetoed by Governor Brownback, is part of the package. It concerns the Depletion Trust Fund to help counties that see their oil and gas production diminish.
- STAR Bonds would be extended. The program currently faces a sunset.
- More counties would become Rural Opportunity Zones, but the Senate rejected the proposal to allow chronically unemployed Kansans to move to a ROZ county and not pay state income tax for three years. Maybe next year, they said.
- Renters would not qualify for Homestead Property Tax Relief, only homeowners. The $13 million saved would be plowed back into Homestead Property Tax Relief.
- Jail inmates would no longer qualify for food sales tax rebates.
- The sales tax on food remains.
- Legislation would make it clear that helium is subject to the severance tax.
- The High Performance Incentive Program (HPIP) would change to make the threshold for qualifying lower in urban counties. Legislation raised the threshold last year.
- The agreement also includes passage of the Senate single-factor (sales) income tax formula provisions. Beginning in 2013, certain corporations relocating to Kansas which employ ten or more full-time employees can base their income tax on sales in Kansas only. Sales outside Kansas would be exempt from corporate income tax. This is an option to the normal three-factor formula (property, payroll, and sales).
Because the measure is a House bill, it will go to the Senate for a vote first. That is if the three Senators and three Representatives on the conference committee sign the report, which is expected to be reviewed Monday.