Reporters, editorialists and even the National Tax Foundation tout the line that Kansas had 191,000 pass-through entities in 2012. According to IRS data, the widely-quoted number, is off by about 140,000. Kansas lawmakers reformed tax policy in 2012, eliminating taxes on LLCs and other pass-through businesses, and lowering income rates for the majority of Kansans.
The 191,000-number is used to suggest hundreds of thousands of Kansas businesses switched their tax status to avoid paying taxes. No one can say where the 191,000 number
originated. What is clear, however, is that the information is wrong. According to IRS data, pass-through entities in Kansas in 2012 numbered 333,590.
Michael Austin, a tax economist for the Kansas Department of Revenue, confirmed the IRS data.
“That’s data from the IRS, and that’s what it shows,” he said.
The erroneous number was repeated in testimony before the Kansas House this session.
The tax foundation put it this way in recent testimony to a Kansas House committee:
“When the exemption was passed in 2012, it was projected that 191,000 entities would take advantage of the provision. As more and more people have realized the very sizeable tax advantage of being a pass-through entity in Kansas, the latest tally (2015) on that number has grown to 393,814 claimants, over twice as many as anticipated.”
The falsehood was regurgitated by editorialists and reporters alike.
Former columnist for the Star, Barb Shelley, put it this way in 2015: “It turns out 280,737 tax filers used the exemption in 2013. So did 53,055 farmers apparently overlooked in the original calculation. So the number of tax-exempt Kansans has climbed to more than 333,000.”
In a 2016 article suggesting small business owners consider the LLC-tax exemption, “free-loading,” the Star again quotes the 191,000 figure.The Wichita Eagle quotes the stat in an article about how the number of people taking advantage of the LLC-tax exemption far exceeded expectations.That’s the tip of the McClatchy ice berg.
Just this week, Politico recycled the number in a story about how President Donald Trump’s tax policy might affect revenues.
It appears no one bothered to check the 2012 numbers. According to IRS data, Kansas had 333,590 pass-through entities in 2012. By 2014, the number had grown to a 339,980.
The IRS data on pass-throughs and other filers lags. In 2017, the only information available is through 2014. Back in 2012, lawmakers would have had data through 2009. That year, there were 191,991 Schedule C pass-through tax filers. However, when other pass-through entities like farms, sub-S corporations and C-corps are added, the number totals more than 329,000. The commonly reported numbers for 2013 and 2014 include all pass-through filers. So, Kansas had 333,500 pass-through entities in 2012, and in 2014, the latest year for which IRS data is available, Kansas had 339,908 pass-through filers.
Kansas Policy Institute President Dave Trabert discovered the error when he was researching another topic.
The number of people converting to avoid taxes was minimal, he said.
“This is not massive,” Trabert said. “You would expect it would be, and the media and tax foundations and others are now saying, ‘Trump, don’t do anything with pass-throughs; it will encourage individuals to switch for tax avoidance. Just look at Kansas,’ they say. But it’s not true.”
The number of non-farm pass-through entities increased by nearly 12,000 in the first two years following the exemption on pass-through income and those entities have been responsible for nearly 98 percent of all private sector job gains since 2012.