Beware of backdoor income tax increase

Many Kansans could be in for an unpleasant surprise when they prepare their state income tax returns: New limits on allowable deductions could mean they will be paying more taxes.

They’ll be even more upset when they realize their taxes are increasing so that about 330,000 business owners can remain exempt from state income taxes.

Most of the attention last legislative session focused on Gov. Sam Brownback and the Legislature increasing the statewide sales tax and cigarette tax. Less noticed was that they also reduced allowable itemized deductions – a backdoor income tax increase.

Kansans are now able to deduct only 50 percent of their mortgage interest and 50 percent of their real estate and personal property taxes on their state tax returns. They also won’t be able to claim any of their medical expenses or any other itemized deduction except charitable donations.

Some lawmakers minimized the impact of these changes, noting that only about 20 percent of Kansas tax filers use the mortgage interest and property tax deductions and fewer claim the medical deduction. But the new limits are projected to increase state tax revenue by about $97 million, which is not insignificant.

Eliminating the medical deduction could be particularly costly for some senior citizens, especially for those paying for assisted living.

The original logic of limiting tax deductions was that Brownback and the Legislature were phasing out the state income tax, which means tax deductions would matter less and less. But the tax cuts failed to deliver the “shot of adrenaline into the heart of the Kansas economy,” as Brownback promised. Instead, tax revenue dropped dramatically, and the state soon faced a budget crisis.

In response, lawmakers and Brownback froze the phasedown of income tax rates last session and accelerated the phaseout of the tax deductions – effectively increasing taxes for some Kansans.

However, one group of Kansans wasn’t affected by the pause in the “march to zero.” Business owners and farmers already are exempt from paying state income taxes on their pass-through income.

Brownback refused to reconsider that tax exemption last session. As a result, some elderly Kansans will be paying more.

This story was originally published February 4, 2016 at 6:07 PM with the headline "Beware of backdoor income tax increase."