The quandary over tax overhaul: Repealing LLC loophole won’t be enough

January 13, 2017

Peter Hancock

In their first joint news conference of the session, the two Democratic leaders of the Legislature said they believe the only long-term solution to the state’s ongoing budget problems is through taxes, and specifically repealing many or all of the sweeping tax cuts that Republican Gov. Sam Brownback championed in 2012.

“We can’t possibly cut our way out of this problem,” Sen. Anthony Hensley of Topeka said. “We don’t need to cut the budget. What we need to do is find a revenue solution.”

Hensley was responding to an earlier statement from Senate Republican leaders earlier in the week in which they criticized Republican Gov. Sam Brownback’s budget proposal, saying, “The solution will require a combination of cuts and changes to tax policy.”

One problem is, there is only one major reversal of Brownback’s tax policies that might stand a chance of getting the two-thirds majority needed to overcome a near-certain veto: repealing the so-called LLC exemption. But that, by itself, only generates about $250 million a year, which budget analysts say is not nearly enough to fix the state’s long-term structural budget problem unless its coupled with significant spending cuts.

Democrats, as well as many Republicans, are saying they want a long-term, structural fix to the state’s budget problems. The problem is, there probably isn’t as much support for passing other measures to reverse the 2012 tax cuts, like reinstating a third bracket for upper-income tax filers, or raising individual tax rates across the board to their pre-2012 levels.

“The LLC repeal is overwhelmingly popular. There’s probably not 10 people in this building with a vote on the floor who support that anymore,” House Minority Leader Jim Ward of Wichita said. “That’s the sugar. But if you take the sugar and eat the dessert first, it’s hard to get the meat and potatoes down.”

It should also be noted that when a stand-alone bill to repeal the LLC loophole came to the floor of the House last year, nearly half of the Democratic caucus at that time voted against it.

“And that was because they knew, the hard, heavy lifting wasn’t in the bill, and it was political gamesmanship,” Ward said, although he himself voted for the repeal.

So the quandary for lawmakers is this: While there may be overwhelming support for repealing the LLC loophole, it may actually be difficult to pass as a stand-alone bill because Democrats, as well as most moderate Republicans, view it as only a partial fix, and because passing it alone will make it harder to get support later in the session for other, more difficult tax increases.

At the same time, if repealing the LLC loophole is attached to a bunch of other tax measures that are less popular politically, the whole package becomes difficult just to pass out of the Legislature, let alone garner the two-thirds majority needed to override an almost certain governor’s veto.

Hensley said he still wants to try for the larger fix, but he acknowledged that repeal of the LLC loophole may be the only thing that passes this year.

“It’s very likely that will be the only thing that’s done, in terms of tax reform, which I think would be very unwise and unproductive,” he said.

The test of how far lawmakers are willing to go on taxes may come on Thursday when the House Taxation Committee takes up a bill that would repeal the LLC loophole, but otherwise would not change overall income tax rates.

This article was originally published on the Lawrence Journal-World website, here.