Aging Population Will Have Modest Effects on States' Revenue

Pew-supported study forecasts reduced income and sales tax collections

Aging Population Will Have Modest Effects on States' Revenue
White paper
Diana Spatariu

The United States is growing older. With declining birthrates, the share of retirees is climbing while the share of working adults is falling. The median U.S. age rose from 30 years in 1980 to 38 in 2017 and is expected to climb to 41 by 2040. Because the bulk of future population aging is expected to occur from 2020 to 2030, policymakers have a compelling interest in the revenue and expenditure impacts of an older U.S. public.

Although much has been written about the effects of an aging population on federal revenue and spending, less has been written about the effects on state governments. In a white paper commissioned by The Pew Charitable Trusts, economist Don Boyd of the University at Albany, State University of New York estimates how major revenue in six states—California, New Hampshire, New York, Ohio, Tennessee, and Texas—would change with an older age distribution.

Boyd used forecasts of 2020 tax revenue and population figures as a baseline and calculated tax revenue across different age groups. He limited his analysis to personal income and sales taxes, which together account for a majority of state revenue collections. These streams are expected to decline for older adults because personal income and consumption of goods and services are lower for retirees than for prime-age workers. By taking revenue figures for 2020 and adjusting only the shares of each age group to match projected 2040 demographics, Boyd estimated how a shift from a 2020 age distribution to a 2040 age distribution would alter tax collections in each state.

The results show that an aging population will have relatively modest direct effects on state revenue. A shift from 2020 to 2040 age demographics reduces overall state revenue by just 2 percent in California, 1.4 percent in New York, 1.3 percent in Ohio, 0.7 percent in Tennessee and Texas, and near zero in New Hampshire (which has no general sales tax and levies only a limited income tax on interest and dividends). These relative declines are anticipated over a 20-year period.

Other aging-related fiscal effects are possible. Although most other state-levied taxes are minor sources of revenue—and unlikely to shift dramatically with an older population—aging will probably alter and place new pressures on state expenditures. Although Boyd did not directly model spending impacts in his analysis, state policymakers should consider future spending needs alongside potential revenue shifts when measuring the implications of an aging population.