AG Derek Schmidt proposes ‘Retire Tax Free’ to eliminate retirement income tax in Kansas
TOPEKA – (June 22, 2022) – Kansas Attorney General and Republican Candidate for Governor Derek Schmidt today announced his “Retire Tax Free” plan to eliminate state income tax on Kansans’ retirement benefits and savings.
“The Schmidt-Sawyer administration is going to focus every single day on growing Kansas, and if we’re going to do that we can’t keep losing retirees at such a high rate to other, more tax-friendly states,” Schmidt said. “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. We’re going to give you another reason to remain or return to Kansas by helping you Retire Tax Free.”
Kansas is currently among the states with the highest outbound migration in America. According to surveys compiled by moving companies and data from the U.S. Census Bureau, Kansas ranked poorly at 10th worst in 2020 and 11th worst in 2021 for outbound migration. In 2021, Kansas lost about 5,200 people from net domestic outbound migration. Departing retirees are a major cause of that outmigration. 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. According to an annual report on migration data, one in five Kansas respondents says the primary reason they decided to leave the state is retirement, and the state’s high tax burden on retirees is widely acknowledged as a significant factor in retirees taking up residence elsewhere.
According to another independent analysis, Kansas ranks as the third-worst state in the country for tax burden on retirees and is in the least tax-friendly category for retirees because of the combined burden of high income, sales, and property taxes. Kansas is one of only 13 states that do not fully exempt Social Security retirement benefits from state income tax.
The Laura Kelly administration has recommended making matters worse by increasing income taxes on retirees and other Kansans who earn more than $50,000 per year.
Schmidt’s plan would instead provide relief to retirees living on fixed incomes and struggling with both the rising everyday costs of inflation and shrinking retirement investments because of market losses. It also would encourage more retirees of all income levels to remain in Kansas, or move to Kansas, rather than move to other states.
Retire Tax Free is an important first step toward the urgent need to grow Kansas. Kansas finished the prior decade with its slowest population growth since the 1930s, and in nearly four years as governor, Kelly has made matters worse. In 2021, Kansas was one of only 17 states in the country that started the new decade with net population loss. Since Kelly’s inauguration, Kansas has 27,400 fewer jobs filled today than in January 2019 and the share of Kansans participating in the labor market is near its lowest rate since 1977. Kelly’s economy ranks among the worst in America according to a recent report. Kansas lags far behind the nation as a whole in recovering jobs destroyed by the pandemic and its lockdowns – 76.7 percent recovered in Kansas versus 96.3 percent nationwide. Amid those broader economic problems, the state’s poor rankings for taxing retirees persist.
“To have a brighter future, Kansas must grow. The ability to Retire Tax Free in Kansas will grow Kansas and add to the civic capital of our communities,” Schmidt said. “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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BACKGROUND: Kansas currently taxes all private retirement benefits and retirement-savings distributions subject to federal income tax. Kansas also taxes Social Security benefits of taxpayers earning $75,000 or more. Military pensions, as well as federal and in-state government pensions, are exempt from state income taxes.
PROPOSAL: “Retire Tax Free” would zero out all state income tax on:
- Social Security retirement benefits;
- out-of-state public pensions;
- private pension benefits;
- defined benefit retirement plans;
- defined contribution retirement plans like 401(k)s;
- retirement annuities;
- individual retirement accounts;
- retirement plans maintained or contributed to by an employer, or maintained or contributed to by a self-employed person as an employer; and
- deferred compensation retirement plans or any earnings attributable to the deferred compensation plans.
Schmidt’s plan would make Kansas more competitive in attracting workers by not taxing their pension benefits during retirement and also in retaining current and future retirees. Nationwide, 12 states do not tax retirement income and Iowa is set to join them. In our region, Kansas would join South Dakota, Texas, and most recently Iowa in exempting all private retirement income from taxation. Kansas would join six other regional states in exempting all Social Security income from taxation
If effective tax year 2023, exempting all Social Security income is estimated to provide approximately $32.5 million in relief in FY23, $109.2 million in FY24, and $112.5 million in FY25. Fully exempting all private retirement income would provide an estimated $69.9 million in relief in FY23, $233.8 million in FY24, and $236.1 million in FY25.
To keep the state budget and state services stable while implementing tax relief to keep more retirees in Kansas, and to avoid shifting the tax burden to other taxpayers, Schmidt would work closely with the Legislature to determine a fiscally responsible approach to achieving the “Retire Tax Free” goal of full elimination of Kansas retirement income – similar to Schmidt’s successful call this year for the Legislature to reduce or eliminate the state sales tax on groceries that resulted in a bipartisan agreement to phase-out the grocery tax. At Schmidt’s urging, the Legislature this year also prepaid $1.125 billion in public pension debt, saving about $100 million per year that will be available to offset much of the budgetary cost of this proposed retirement-tax relief for years to come.