When Kansas exempted pass-through income from state income tax beginning in 2013, the Department of Revenue estimated that 191,000 entities would take advantage of the provision, but the actual number of 330,000 claimants in the first year prompted media to declare that the exemption created a massive wave of tax evasion. Tax return data from the Internal Revenue Service, however, shows that the original estimate was mistaken.
According to KDOR Chief Economist Michael Austin, ” In 2011, when the tax policy was estimated, KDOR referred to Federally-held IRS data. The most recent dataset available at the time was for tax year 2009 and it had three categories of returns that would be considered as tied to a personal business; “Business or Profession Net Income”, “Number of Farm Returns”, and “Partnership/S-Corp Net Income”. The sum of these three business returns resulted in an estimate of 330,000 filers that would be impacted by the tax policy.”
There were 191,991 Schedule C proprietors in 2009, which is very close to the number of entities used in legislative and media discussions but including farm returns from Schedule F and other entities from Schedule E, Kansas actually had 329,511 total pass-through entities in 2009.