Editor's note: This story was updated to include news from Maryland.
As Americans begin the challenge of filling out their tax returns this year, one taxpayer demographic generally pays less than others: senior citizens.
Tax breaks for seniors cost states approximately $27 billion a year and will more than double in the next decade, according to a recent study from the progressive Center on Budget and Policy Priorities in Washington, D.C. That money could pay for schools, roads and other needs, critics argue.
Giving a break to seniors based on their age rather than their income or financial status dates from a time when people had shorter lives and fewer investments. But the financial situation of seniors has improved overall, leaving some experts to question whether the tax breaks make sense.
“I think part of it is because there is sort of an image of seniors living on fixed incomes struggling to get by,” said Elizabeth McNichol, who wrote the study. “I think that’s stuck in peoples’ heads. The reality is the senior poverty rate is less than for other people and certainly less than for younger people and children.”
In 1970, about a quarter of the over-65 population had below-poverty income, the report pointed out, citing the U.S. Census Bureau’s official poverty measure. Since then, retirement income, including Social Security, has expanded. Today, only 10% of those over 65 are poor, according to the same measure.
By comparison, the rate of children under 18 living in poverty is 16%, according to the latest U.S. census figures.
But, the report noted, senior poverty is higher within minority groups and among the very old — leading to greater disparities in wealth among senior citizens. “As a result, many longstanding state tax preferences for seniors now benefit taxpayers with much better ability to pay taxes than lower-income households,” the report said.
The state income tax liability of seniors varies. Seniors in Georgia paid just 42% of what they would have paid as non-seniors, compared with 90% in Rhode Island, according to a 2016 study in Public Finance Review. However, state lawmakers have little incentive to stop handing tax advantages to seniors.
Older folks vote more, and they have powerful lobbyists like the AARP to look after their interests. In fact, a half dozen states — including West Virginia, Pennsylvania, New York and Virginia — already are gearing up with new or carryover senior tax break legislation for the coming legislative sessions.
Those would be in addition to 28 states and the District of Columbia, which exempt Social Security income from state income tax. Another 26 states exempt private pension income from taxes, in full or in part. And all but six states give additional age-based benefits such as personal income tax exemptions, higher standard deductions or extra tax credits.
AARP’s Elaine Ryan, vice president for state advocacy and strategy, said in an email to Stateline that while the group generally supports tax preferences that are “equitable, cost-effective and targeted to those who have lower and moderate incomes,” seniors have special needs.
Those include a greater need for financial security, as pensions don’t keep up with the cost of living or are eliminated altogether and can’t compensate for the increasing costs of groceries, utilities and prescription drugs, she said.
She also noted that the most recent data from the Census Bureau’s supplemental poverty measure — an alternate poverty measure that accounts for many of the government programs designed to assist low-income families and individuals that are not included in the official poverty measure — shows that nearly 14% of seniors are at or below the poverty level, slightly higher than the overall population (13%).
But the cost to state treasuries is significant, setting up battles between old and young as well as competing special interests.
Take Michigan. A couple of bills last year that would have done away with the state’s tax on government worker pensions got caught up in arguments about how to make up for the estimated $330 million annual loss to the state treasury.
A similar bill is under consideration this year, sponsored by state Sen. Paul Wojno, a Democrat, who argues it’s a matter of fairness. Many employees were told their pension would be tax-free, he said, when they went to work for the state government.
Former Gov. Rick Snyder, a Republican, imposed the levy in 2011. Current Gov. Gretchen Whitmer, a Democrat, campaigned on getting rid of it.
“We do have a large number of individuals who worked in public service,” Wojno said in a phone interview. “They went in and they had promises made to them. …. They earned their pension and they deserve to maintain as much of it as they were promised.”
Wojno said his proposal would not raise other taxes, but to compensate for the lost revenue, the state could tap $450 million that was allocated but never spent. He also said his proposal would not take money from vital services such as education.
But it was those worries over school funding that led the Michigan Association of School Boards to oppose the move, according to Jennifer Smith, the group’s director of government relations.
“We’re opposed at this point because [the pension tax] brings in a significant amount of revenue,” she said. “If the pension tax is repealed, it’s a $70 million cut to the school aid fund. We’re not arguing the merits of the pension tax — it’s $70 million that would no longer be available to the school aid fund.”
James Hohman, director of fiscal policy at the Mackinac Center for Public Policy in Midland, Michigan, said concerns over where money will come from to fix the state’s crumbling roads also play into the debate.
In addition, he said, there’s a fairness issue over proposing to exempt pensions from taxation, but not other sorts of retirement income, especially as fewer and fewer companies fund defined benefit pensions and go with employee-funded 401(k) accounts, for example.
“States have generally wanted to give preferences to taxation for people in retirement,” he said. “I understand why the state is mimicking a lot of other states in giving preference for retirees. But to do it for pensions only is inappropriate and unfair to people with other types of retirement income. In the future, especially, there are going to be a lot of people in retirement with other types of income than pensions.
“There’s probably a good reason most states have a preference for retirement income,” Hohman said, noting the politics behind the policies. “Popular policy really matters. A lot of states look at it as something desirable. Is it a fair policy? A lot of people have opinions on that.”
In Maryland this week, Republican Gov. Larry Hogan proposed cutting income taxes for retirees who make less than $100,000 a year and eliminating them for retirees who make less than $50,000, saying it would help keep retirees in the state.
Similar tax breaks for seniors took effect in Connecticut last year. The state already exempted Social Security income from taxes if a retiree’s annual income was less than $50,000 for an individual or $60,000 for a couple. But the state raised those ceilings to $75,000 and $100,000. Income over those limits will be 75% exempted.
Then, Connecticut started to phase in tax exemptions for retirees with pensions and income from savings and investments at the same thresholds. During legislative debate on the issue, lawmakers said the breaks would help keep retirees in the state, rather than have them move to states with lower taxes.
The belief that retirees move for tax reasons is fueled by popular magazine stories with headlines like “2020’s Best States to Retire.” But a recent Kiplinger piece sounded a cautionary note. The article — “Should You Relocate to Trim Taxes in Retirement?” — noted other factors to consider, such as local cost of living and taxes on property and consumption.
Fred Carstensen, a professor of finance and economics at the University of Connecticut who has studied the issue, said the idea that retirees move for lower taxes is false.
“Does anybody really believe you are going to move to a different state, separate from community, family and friends, because you want to avoid taxes? No,” he said in an interview. “If you lived in Westport [a wealthy Connecticut suburb], why would you move to someplace that doesn’t offer the quality of life that Westport has?”
He also said the new tax breaks forfeit $170 million in revenue at a time when the state’s economy has been shrinking.
McNichol, of the progressive think tank, says the tax cuts for seniors and the subsequent revenue forfeiture are not fair at all.
“All of it eats into the revenue for services that affect everyone, but also infrastructure that would help seniors — better roads, better health care,” she said. “It’s really important now to try to target seniors’ tax breaks. The share of population in each of the states is aging, and we really need to invest in the whole population.”