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State Tax Breaks a Costly, Ineffective Way to Attract Wealthy Seniors

Can a state get an economic boost by giving senior citizens special tax breaks?  Maine’s governor, Paul LePage, claims so.  Last week he renewed his proposal to exempt all pension income from the state’s income tax.  (Maine already exempts Social Security income and some pension income.)  He argues that this tax cut would encourage wealthy retirees to move to Maine.  Other states have considered similar proposals.

Such tax breaks are costly and will grow much more costly as the senior population rises, as we pointed out in a

a few years back.  Given the continued budget problems that Maine and other states face, such tax breaks inevitably come at the expense of schools, health care, roads, and other public services — all of which a state needs to compete economically.

With little evidence, LePage and others have argued that increased economic activity generated by seniors who move to (or remain in) the state because of the tax break would offset some of the revenue lost to the tax cut.  This is farfetched.

For one thing, a host of studies show that seniors choose where they live based on a variety of factors, including closeness to family, the weather, jobs, and the availability of services like health care.  Taxes matter very little.

In fact, a recent study by professors Karen Conway of the University of New Hampshire and Jonathan Rork of Reed College finds that state tax breaks for seniors enacted over the last four decades have had zero impact on senior migration patterns.  “Our results are overwhelming in their failure to reveal any consistent effect of state income tax breaks on elderly interstate migration,” they report.

As Conway and Rork’s report concludes, “Our results, as well as the consistently low rate of elderly interstate migration, should give pause to those who justify offering state tax breaks to the elderly as an effective way to attract and retain the elderly.”  Even if a few seniors were to move to Maine or stay there because of the added exemption, the cost of giving virtually every retiree in the state a tax break would far exceed the benefit to the state.

In this era of limited resources, every tax dollar is needed to maintain the services that contribute to a quality of life that actually attracts residents.  States should steer clear of tax breaks that have already proven ineffective.