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Business owners embrace Brownback's tax plan

POSTED: January 20, 2012 7:00 a.m.

Business owner Ken Daniel, of Topeka, was beaming Thursday as he listened to members of Gov. Sam Brownback's cabinet explain to lawmakers details of the administration's latest tax and budget plans.

"I'm really happy with the tax plan," said Daniel, chairman of Midway Wholesale, a building materials distributor, and part owner of various other local small businesses.

"Most of my businesses are subchapter S corporations or partnerships," Daniel said.

In subchapter S corporations or partnerships, business profits are taxed as part of the owners' personal income. Subchapter S corporations, which are much smaller than large publicly held regular corporations, are named after the section of IRS tax codes that defines them.

Both business classifications, along with sole proprietorships and mom and pop stores, would receive a significant tax break under Brownback's proposal.

The highest rate charged on their personal incomes would be cut 24 percent — to 4.9 percent from Kansas' 6.45 percent top personal income tax rate. And much of the non-wage business income these owners report on federal tax returns would not be taxed at all on their state returns.

"We're smiling, too," said Dan Murray, head of Kansas' chapter of the National Federation of Independent Business, the nation's largest advocate for small business.

"Small businesses account for 97 percent of the state's employers, and nearly 75 percent choose a pass-through business structure," such as a partnership or subchapter S corporation, Murray said.

"The bottom line is that eliminating the income tax would help small business owners and encourage spending, which would only help our economy," Murray said. "We think this is terrific."

But representatives of a significant bloc of Kansas business owners — farmers and ranchers — offered a more subdued evaluation.

"Like a lot of folks, we're still looking for more details," said Brad Harrelson, assistant government relations director for Kansas Farm Bureau, the state's largest general farm organization.

"I'm particularly intrigued by what looks like the tax rate on non-wage income going to zero," Harrelson said. "I don't think that is insignificant to the folks we represent."

Farmers and ranchers will be watching to see what happens to property taxes — the biggest potential tax exposure for many — under the plan.

"We agree that Kansas needs a more favorable and simpler tax system, but we want to be sure that it won't come at the expense of property owners," Harrelson said.

Donn Teske, president of the Kansas Farmers Union, the state's second largest farm group, said in addition to property tax exposures, many farmers and ranchers want to see what eliminating tax credits and deductions to simplify the state's tax code will mean for tax breaks on production equipment and other expenses.

"Many of the things we used aren't taxed now, and when they start messing with that, we get nervous," Teske said.

But Wichita certified public accountant Gary Allerheiligen, who watches tax issues on behalf the Kansas Society of Certified Public Accountants, a professional organization, said similar qualms by small business owners are misplaced.

"This is a bold plan that goes beyond anything I've seen in any other state," Allerheiligen said. "If you have rental income, it won't be taxed. If you have an interest in an oil or gas well, it won't be taxed."

Administration officials predict the plan will produce a jolt of economic activity, bring more businesses to the state and generate enough sales and consumption tax income to offset reduced income taxes. So, Allerheiligen said, losing a tangle of specific small business tax credits would be manageable.

"You don't need the credit if you don't owe the taxes," he said.

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