Governing has a new article describing how some states are, or are studying, the feasibility of increasing state and local tax burdens on the elderly. Aside from reducing or eliminating local property tax exemptions, the most controversial part of their plans are proposals to make some or all of retirees' pension and Social Security benefits taxable.
Kentucky is one state apparently taking the lead, estimating that its generous tax exemptions currently cost it more than $1.3 billion per year. In that state, individuals can exempt about $41,000 in pension income (double that amount for married couples), all of their Social Security benefits, and $41,000 of the assessed value of their homes. It is considering a proposal that would exempt a senior's pension only if it pays out no more than $30,000 annually and is the pensioner's sole source of income other than Social Security.
Colorado, Georgia, and Hawaii are also looking to make similar cutbacks. And Michigan has taken an incremental approach, keeping exemptions in place for those born before 1946. The deepest cuts affect taxpayers born after 1952.
Those favoring tax reform maintain that many seniors don't need the extra money. Fifty years ago, the favorable tax treatment was necessary because poverty rates were far higher for seniors than for any other age group. Today's rates are considerably higher for children and working-age adults.
Not surprisingly, the AARP has taken a strong stance against such changes. It points out that many seniors had their savings wiped out in the recent recession, just as they were hitting retirement age. Others who argue for the status quo assert that (1) Social Security should not be taxed because workers have already paid payroll tax to support its payout and (2) states should try to attract seniors because they contribute more than their share to the economy.
