Derek Schmidt proposes tax cuts on retirement income after House Republicans killed similar plans
Jason Alatidd
Republican gubernatorial frontrunner Derek Schmidt announced a "retire tax free" plan to cut taxes on retirement income after House GOP leadership effectively killed similar proposals.
Schmidt said he wants to focus on growing Kansas.
"If we’re going to do that we can’t keep losing retirees at such a high rate to other, more tax-friendly states," he said in a statement. "To every retiree considering leaving Kansas after a lifetime of working and living here, we want you to stay. To every retiree in another state looking to move, come to Kansas."
Kansas currently taxes income from IRAs and 401(k) plans, out-of-state public pensions and Social Security benefits. Military, federal government and in-state public pensions are already exempt.
Schmidt rolled out the policy proposal on Wednesday to eliminate state taxes on all retirement income, but the idea isn't new.
"We've passed it at least twice in the Senate, both removing it on Social Security and removing it on retirement accounts," said Sen. Caryn Tyson, R-Parker. "And the House, when we were negotiating, House leadership would not accept the position."
A proposal to fully eliminate taxes on retirement income passed the Senate in 2021 as part of a large tax cut package, but SB 22 died in a House committee this spring. This legislative session, a smaller retirement income tax cut in the HB 2597 package was killed by House GOP leadership.
Tyson, who is the Senate tax committee chair, is running for state treasurer. She said she never found out why House leadership wouldn't support the tax cut.
"I know I fought diligently for it," she said. "To me, it's not about politics. It's about policy, the best policy for the state of Kansas. With the increased taxes being collected in Kansas, we can absolutely afford this legislation."
Democratic Gov. Laura Kelly's campaign didn't appear receptive to Schmidt's proposal.
"Just like a typical politician, Derek Schmidt will say or do anything during an election year, but his real record shows that he’ll take us back to the Brownback era of fiscal irresponsibility and underfunded schools," Kelly campaign spokesperson Lauren Fitzgerald said in a statement.
The final report from the Governor's Council on Tax Reform didn't include cutting taxes on retirement income among its recommendations. The 174-page report, released in April, did suggest studying why the population is growing slower than neighboring states.
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Derek Schmidt's tax cut plan
Schmidt's campaign is marketing the policy position as a way to stem the flow of people moving out of Kansas. They cited moving company surveys and U.S. Census Bureau data showing Kansas ranks poorly for outward migration.
About 21% of people who moved out of Kansas in 2021 left primarily because of retirement, a United Van Lines study found.
"Departing retirees are a major cause of that outmigration," the Schmidt campaign said in a news release. "Nationwide, retirement is the third most-common reason for moving away from a state, and that trend is accelerating. Kansans are increasingly likely to leave at retirement — taking a lifetime of accumulated talent and wealth with them."
Kiplinger's, the personal finance magazine, ranked Kansas as the third-least tax-friendly state for retirees.
"While there's no place like home, I wouldn't be surprised to hear that Dorothy (and ToTo, too) fled Kansas when she retired to avoid the state's high taxes," the Kiplinger's story said.
Kansas is one of 13 states that taxes Social Security benefits, according to AIG Retirement Services.
"To have a brighter future, Kansas must grow," Schmidt said. "The ability to Retire Tax Free in Kansas will grow Kansas and add to the civic capital of our communities. Our state’s heavy tax burden is one of the significant obstacles to population growth and a significant reason so many Kansas retirees move away, taking with them their lifetime of talent, civic involvement, and savings."
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Derek Schmidt proposes larger tax cut than latest legislation
The most recent legislative action on cutting taxes on retirement income came in HB 2597.
The bill was a gut-and-go of what originally was a bill on specialty wildlife and parks license plates. Lawmakers about a dozen tax proposals into it during spring conference committee meetings.
One provision in the bill would have expanded the existing income tax exemption on Social Security benefits, which is currently $75,000 in federal adjusted gross income. The bill would have created a phase-out with a threshold of $85,000, with that amount increasing $5,000 a year.
If passed, the so-called Social Security cliff progressive phaseout was projected by legislative staff to reduce state revenues by about $21 million over three fiscal years.
Another provision in the bill would have created a subtraction modification exempting up to $2,000 for an individual or $4,000 for joint filers of retirement plan income. The exemption would increase via an annual cost of living adjustment.
The retirement income subtraction modification would have reduced tax revenues by about $76 million over three years.
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Schmidt's plan to eliminate state income tax on retirement benefits and savings would be more costly than what legislators had pushed for in HB 2597.
According to estimates provided by the Schmidt campaign, exempting all Social Security income from state taxes would cut state revenues by about $254 million over the next three fiscal years. Meanwhile, a full exemption of all private retirement income would cost $540 million.
The campaign said, "Schmidt would work closely with the Legislature to determine a fiscally responsible approach."
"I'm glad that Derek Schmidt is willing to take a lead on this and be out front," Tyson said. "We need to help Kansans with every opportunity possible. With the way inflation is increasing and the state coffers keep growing, we need to put that money back in Kansas taxpayers' pockets."
Tax cut died as Republican leaders split on issue
Schmidt's tax cut push comes a month after legislators left Topeka without passing HB 2597 and nearly two months after he discouraged further tax cuts this year.
"It is a very comprehensive fiscal package," Schmidt said in late April of legislation already passed, "and probably coming back at the 11th hour and trying to shoehorn in one more idea from whichever faction may not be the most prudent thing to do."
The Schmidt campaign said he wasn't involved in legislative efforts on HB 2597.
Earlier that week, House GOP leadership reneged on a deal made by House and Senate negotiators that included the retirement income tax cuts.
House tax committee chair Rep. Adam Smith, R-Weskan, told a tax conference committee that he "was made aware that there were some priorities that had been changed" on HB 2597 during the Legislature's April break.
"What priorities and who changed the priorities, may I ask?" Tyson said.
Smith said the decision was made "in discussion with House members and House leadership," but did not name who gave the directive. He said it was "sad to see a lot of those other pieces go," but promised "to come back in force next year."
Sen. Gene Suellentrop, R-Wichita, tried force a vote on HB 2597. That move got bogged down in procedural problems as the Senate worked into the early morning hours.
Tyson then tried to revive the bill on the last day of the session in May. It passed the Senate unanimously, but the House had already adjourned for the year, making the vote largely symbolic.
Jason Tidd is a statehouse reporter for the Topeka Capital-Journal. He can be reached by email at jtidd@gannett.com. Follow him on Twitter @Jason_Tidd.