Time to Revisit State Tax Breaks for Seniors

While states that provide special tax breaks for seniors regardless of their income may appear attractive places to retire, those tax breaks will become significantly more costly over the next few decades as the elderly’s share of the population grows, as my colleague Nick Johnson noted in a recent U.S. News & World Report blog post.  Those growing costs will make it harder and harder for these states to maintain high-quality public services, which can have a big impact on quality of life in a state.

In a 2006 report I examined tax breaks for elderly residents on a state-by-state basis.  More than half of the states exempt Social Security income from the income tax, for example, and most fully or partially exempt pension income.  Many states also have special property tax exemptions or credits targeted to the elderly.

Decades ago, when many of these tax breaks were created, elder poverty was much more widespread than it is now, and it seemed reasonable to relieve the tax burden on the elderly.  But the decline in elder poverty since then means that many of those tax breaks now benefit taxpayers who are at least as able to pay taxes as non-elderly residents are.  Moreover, in many cases, the seniors who benefit most from a given tax break are those with the highest incomes.

The report shows that by better targeting income and property tax reductions on low-income seniors, states can free up resources to pay for the growing needs of senior citizens while still assisting poor elderly residents.