State Tax Breaks for the Elderly Primarily Benefit Wealthier Citizens and Drain State Coffers

Poverty among the elderly rapidly declined during the last century in part because of the Social Security program, which is credited today with keeping up to 22 million people out of poverty. No one wants to work a lifetime only to face poverty in their golden years, so it is no wonder that states offer varied tax breaks for their elderly citizens, including not taxing pensions and other retirement benefits.

But an updated brief from ITEP finds that, in spite of their popularity, tax breaks for the elderly are often a poorly targeted, costly commitment for states that may not be accomplishing their desired effect.  In many cases, wealthy elderly taxpayers reap the majority of the benefits from state income tax breaks designed for older adults. Further, with the nation’s aging population, these tax breaks threaten to become unaffordable in the long-run.

Many older Americans continue to work into their golden years. Others retire, yet they continue to bring in income by collecting Social Security and pension benefits. In most states, retirement income is frequently not taxed or sheltered through generous tax breaks. This shifts the cost of funding public services to members of society who remain in the labor market and non-elderly taxpayers. Of states with a broad-based income tax, three fully exempt all retirement income from taxation; 36 allow some exemption for private or public pension benefits; 20 allow senior citizens an additional personal exemption or exemption credit; and seven allow senior citizens to claim the higher federal standard deduction. In addition, 22 of the 30 states that provide a property tax credit limit availability to seniors or offer them a more generous version of the credit.

Ill-targeted elderly tax breaks raise concerns of both fairness and sustainability.

The percentage of the U.S. population over the age of 65 continues to grow, expected to exceed one-fifth of the nation’s population in the next 25 years. With a rapidly aging population come state budget challenges, in the form of both growing expenses and revenue loss. As older Americans age, they tend to earn less–bringing in a reduced amount of income tax revenue for states. They also spend less–providing states with a reduced amount of sales tax revenue. The Federal Reserve Bank of Kansas City produced a study on The Impact of an Aging U.S. Population on State Tax Revenues, finding that on a per-capita-basis demographic shifts alone will reduce individual income taxes and sales taxes, although to a lesser extent, in nearly every state in the country. Increasingly generous and often poorly targeted tax breaks for older adults only contribute to state budget woes.

There’s something to be said for being kind to your elders. But states should weigh whether these costly tax breaks are money well-spent, or if they are largely benefiting well-off retirees. The details are in the design of the break. Rather than providing broad, expensive breaks, states should retool their elderly tax breaks to better target low-income seniors. This will allow states to aid those most in need while committing to a more fair and sustainable tax system.

For more read “State Tax Breaks for Elderly Taxpayers,” ITEP’s updated report on the topic.