Schmidt proposes exempting retirement benefits from KS income tax

Attorney General Derek Schmidt, the Republican gubernatorial candidate, proposed a tax reform package that would exempt retirement benefits from state income taxes. Schmidt is seated with running mate Katie Sawyer. (Tim Carpenter/Kansas Reflector)

Kansas reflector

TOPEKA — Republican gubernatorial candidate Derek Schmidt on Wednesday proposed eliminating the state tax on benefits and income from Social Security, IRAs, pensions and other retirement instruments in a bid to curb population migration from Kansas.

Schmidt, the attorney general and presumptive November opponent of Democratic Gov. Laura Kelly, said the recommended stimulus package would be combined with existing income tax exemptions on military, federal and state pensions to retain or attract retirees, as well as draw interest from people who are prepare for retirement. The policy change could help Kansas businesses recruit workers, he said.

“We want every retiree who is considering leaving Kansas after a lifetime of working and living here to stay,” Schmidt said. “Any out-of-state retiree who wants to move, come to Kansas. We will give you another reason to stay or return to Kansas by helping you retire tax-free.”

Schmidt said the proposal would zero state income tax on Social Security pension benefits, out-of-state public pensions, private pension benefits, defined benefit plans, defined contribution plans such as 401(k)s, retirement benefits, individual retirement accounts, pension plans maintained by an employer or contributors, pension plans maintained by or contributed to by a self-employed person as an employer, and deferred-compensation plans, or any income attributable to a deferred-compensation plan.

The US economy has endured the COVID-19 pandemic, inflation and stock market volatility that have contributed to the erosion of retirement accounts.

Schmidt said acceptance of the proposal by the Legislature would bring Kansas in line with South Dakota, Texas and 10 other states — Iowa will soon join that group — that exempt all private retirement income from state taxation.

The social security provision would bring Kansas together with six other state states that exempt these benefits from state income taxes, he said. Currently, Kansas taxes Social Security if an individual with a federally adjusted gross income of more than $75,000 per year disposes.

The cost to the treasury of Schmidt’s “Retire Tax Free” initiative would escalate over the next three years. Under his proposal, the cost of exempting Social Security benefits would increase from $32.5 million in fiscal 2023 to $109 million in fiscal 2024 and $112 million in fiscal 2025.

Exempting all private retirement income completely would reduce government revenue by $69.9 million in fiscal 2023, $233 million in fiscal 2024, and $236 million in fiscal 2025.

Schmidt said in a statement that he would work “closely” with the Legislature to establish a fiscally responsible method of incorporating pension tax reforms into the state budget.

The 2022 Legislature approved and Kelly signed a bill that will invest $1.1 billion in the state’s public employee pension system. Lawmakers also created a $500 million budget stabilization fund.

The House, Senate and Governor enacted legislation to phase out the state sales tax on groceries over a three-year period. Kelly had proposed an immediate end to the state’s 6.5% sales tax on groceries. Meanwhile, a slew of tax reform bills have passed, including one with $50 million in wealth tax breaks for businesses that have shut down during the pandemic.

The Schmidt campaign — his running mate is Katie Sawyer — said an analysis by Kiplinger showed Kansas ranked third-worst in the country on income, sales and property tax burdens.

According to moving company surveys and US Census Bureau data, Kansas was ranked the 11th-worst place for emigration in 2021.

“To have a brighter future, Kansas needs to grow,” Schmidt said. “Our state’s high tax burden is one of the biggest obstacles to population growth and a major reason so many retirees are moving away from Kansas, taking their lifelong talents, civic engagement and savings with them.”

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