Robust state tax revenue surplus in Kansas inspires kaleidoscope of reform proposals
House Speaker-elect Dan Hawkins of Wichita said he anticipated the 2023 Legislature would debate proposals to move from a tiered state income tax system to a flat tax in which all taxable income was subject to the same rate regardless of income level or assets. (Pool photo by Evert Nelson/Topeka Capital-Journal)
TOPEKA — Gov. Laura Kelly and the joint House and Senate tax committee agree the 2023 Legislature ought to work on bills addressing the state income tax cliff applicable to retirees with more than $75,000 in annual earnings.
Under Kansas law, an individual or married couple is exempt from state income tax on Social Security benefits if federal adjusted gross income stayed under $75,000. If yearly income were to exceed that amount in Kansas, the state applies the income tax Social Security. It’s viewed by Democrats and Republicans as an arbitrary “cliff” that treated taxpayers differently even if the distinction was the couple pennies between income of $74,999.99 and
“It’s bad policy to have such a cliff and it’s not good for retirees,” Kelly said.
The governor, who will be inaugurated Jan. 9 and deliver her state of the state speech Jan. 11, said the 2023 Legislature ought to raise that income tax exemption threshold to $100,000. Her proposal would cost the state treasury about $50 million over a three-year period.
Derek Schmidt, the Republican nominee for governor, proposed an income tax exemption on all forms of retirement programs, including IRAs and 401(k)s, out-of-state public pensions and Social Security. Kansas is among 13 states with some form of income tax Social Security income.
Rep. Adam Smith, a Weskan Republican and chairman of the interim House-Senate committee assigned to work on tax policy, said there was bipartisan interest in removing the $75,000 cliff. In addition, he said, the Legislature should adjust the statute to end a “marriage penalty” arising from language creating the $75,000 cliff whether the taxpayer was an individual or married and filing jointly.
The House and Senate should be motivated to reduce and ultimately eliminate the state tax on Social Security because that part of the tax code was a disincentive to earn money, said Sen. Caryn Tyson, the Parker Republican who chairs the Senate Assessment and Taxation Committee.
“We engineer behavior through our tax structure,” Tyson said.
Smith also said the Legislature should churn through the tax code in search of provisions no longer relevant and ripe for repeal. Targets need to be identified in a bill and subject to committee hearings so organizations or individuals would have a chance to defend or attack tax provisions, he said.
Food for thought
During the legislative session opening in January, lawmakers are expected to present, debate and vote on a wide range of tax reforms designed to take advantage of the state’s surplus that could surpass $2 billion. Disagreement about how to spend down that reserve could be fierce, even when there is general agreement on the problem.
Kelly recommended during her reelection campaign the Legislature speed removal of the 6.5% state sales tax on groceries. On Jan. 1, that state sales tax on groceries drops to 4%. Under a law passed by the 2022 Legislature and signed by the governor, the tax would fall to 2% in 2024 before expiring in 2025.
She vowed to introduce a bill in January that would spike the state’s food sales tax as early as April 1 or no later than July 1.
“We need to think about effective, financially responsible policies that are going to help average taxpayers and not hurt the state in the long run,” Kelly said.
House Speaker-elect Dan Hawkins, a Wichita Republican, and Senate President Ty Masterson, the Andover Republican, haven’t expressed enthusiasm for complying with the governor’s food tax agenda.
Sen. Jeff Longbine, a Republican from Emporia, said he would place a priority on reducing state income taxes on retirement income, but could see that reform packaged with a more rapid reduction in the sales tax on groceries.
“Is there a compromise deal that can be made? Possibly,” Longbine said.
The Legislature also could explore the state’s participation in a multistate sales tax partnership due to restraints on passage of certain tax law in Kansas. The agreement among states has frustrated the Legislature, because rules inhibited adoption by Kansas of a temporary sales tax holiday for back-to-school purchases. Legislators and Kelly have proposed creation of the brief tax holiday in 2023.
A flat tax?
Hawkins, who served as House majority leader before nominated to be House speaker, said he anticipated the Kansas Senate would take the lead on tax reform legislation during the annual session. That conversation in the Capitol is likely to include proposals to move Kansas from a tiered state income tax to a flat tax in which all taxable income was subject to the same rate regardless of income level or assets.
“I would imagine we’ll see something like that from the Senate tax committee, but I’m not sure in what form,” Hawkins said.
Americans for Prosperity of Kansas has proposed the Legislature replace the existing income tax structure with a “flatter, lower tax rate to bring simplicity to the Kansas tax code and budget management.” The organization also recommended a mandate requiring two-thirds majority votes in the House and Senate for passage of a tax increase.
Sen. Jeff Pittman, D-Leavenworth, said he was skeptical of a flat tax on income because it would more resemble the regressive sales tax.
“A flat tax negatively affects the lower income folks and gives higher end, high income folks a bigger tax break,” Pittman said.
In addition, he said, his constituents were much more likely to complain about the rapid escalation in property valuations that lead to higher property tax bills than to raise questions about state income tax rates.
The Legislature should give consideration to requiring that county tax appraisers to be elected rather than appointed, said Sen. Virgil Peck, a Havana Republican. He said the change would make appraisers of property more accountable to taxpayers and potentially moderate changes in valuation.
This article was used by permission from the Kansas Reflector. The Kansas Reflector is a non-profit online news organization serving Kansas. For more information on the organization, go to its website at www.kansasreflector.com.