Lawmakers eye reform for ‘tax cliff’

With a surplus of state tax revenue, a bipartisan group of Kansas lawmakers want to address an income tax cliff for some retirees. Lawmakers have a variety of other proposals for how to spend the surplus.

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State News

December 30, 2022 - 12:07 PM

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 to Social Security. It’s viewed by Democrats and Republicans as an arbitrary “cliff” that treats taxpayers differently, even if the distinction was the couple of pennies between income of $74,999.99 and $75,000.01.

“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.

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