Minnesota Stand-Off
In Minnesota, a $2 billion tax cut proposed by House Republicans includes a tax exemption for Social Security income and military pensions.
Minnesota has a $1.8 billion budget surplus, but Republicans are at odds with Democratic Gov. Mark Dayton over what to do with the money. Among other things, Dayton has proposed a universal pre-kindergarten plan.
"The governor does not support the House GOP proposal to exempt all Social Security income from state taxes, as it most greatly benefits the wealthiest recipients," said Dayton spokesman Matt Swenson. "However, he would consider raising the current income brackets to lower Social Security taxes on middle-income seniors."
Minnesota currently exempts part of the Social Security income from taxes, on the same sliding scale as the federal government.
Compromises
In Maryland, Republican Gov. Larry Hogan proposed eliminating over four years income taxes on military and public safety retirement benefits. The Democratic-led legislature trimmed the plan, exempting the first $10,000 of their retirement benefits from taxation. Hogan’s press secretary Shareese Churchill, said Hogan plans to sign the bill later this week.
In Rhode Island, residents currently pay state taxes on Social Security benefits, as well as most other pensions and retirement income. Although some lawmakers want to make most of the retirement income-tax free, Democratic Gov. Gina Raimondo proposed eliminating the tax on only lower- and middle-income Social Security recipients, a proposal that seems to have more support.
Gary Sasse, a former Rhode Island director of revenue and founding director of the Hassenfeld Institute for Public Leadership at Bryant University, praised the governor.
"That's a fairer and more efficient way to do it," he said. "Some proposals were for exempting Social Security from tax regardless of income. They make the case that it would keep money in the state and improve the economy. There is no empirical evidence to prove that."
Senior Breaks
Senior citizens already receive many tax breaks. Federal law gives them a higher standard deduction on their income taxes and a full or partial income-tax exemption for Social Security payments, depending on levels of income.
Nine states — Alaska, Nevada, South Dakota, Texas, Washington, Wyoming, Florida, New Hampshire and Tennessee — have no income tax at all. Three states with a broad-based income tax (Illinois, Mississippi, and Pennsylvania) exempt all retirement income —including pensions, Social Security and annuities — from taxes. Thirty-six states with an income tax allow some exemptions for pension benefits. Thirty-two states with an income tax exempt all Social Security benefits.
Despite the trend, Meg Wiehe, state tax policy director for the Institute on Taxation and Economic Policy, which surveyed senior tax breaks, said all of the efforts to have “blanket state tax preferences for elderly taxpayers is … a very ill-advised policy.”
She also pointed out that states which shield retirement income – Social Security and pensions, for example – while still taxing wages, are favoring the rich over the poor. “You are ignoring low-income seniors who have to continue to work past traditional retirement age because they don’t have the savings that others have,” she said.
Some tax policy analysts question the idea of giving seniors tax breaks at all.
"I think tax breaks for old people are silly from a tax policy perspective," said David Brunori, deputy publisher of Tax Analysts, a trade publication. "Under no theory of taxation should a person who turns 62 (or whatever age we pick) magically be exempt from taxation."
"And let's face it," he said, "states offer tax relief to old folks because those folks vote more than anyone else."
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