During the last legislative session, Connecticut exempted all military pension income from the state income tax, joining 14 other states that do so. The new exemption takes effect on passage and applies to tax years beginning on or after January 1, 2015. Connecticut expects to recoup the revenue loss from increases in business taxes that were also enacted during the session. Previously, Connecticut allowed its veterans to exempt only half of their retirement pensions from the state income tax.
According to a Stateline article by Elaine S. Povich, a few other states, including neighboring Rhode Island, introduced bills exempting all military pension income from the income tax, but none succeeded. Maryland, though, opted to increase its annual military pension income tax exemption from $5,000 to $10,000.
The article cites income tax rates among the factors military retirees consider when deciding where to live. Consequently, Connecticut is part of a “growing competition among the states wanting to attract and keep military retirees, who are some of the best-educated, best-trained and youngest retirees around," Povich stated.
Exempting military pension income is a “no-brainer,” Minnesota Representative Bob Dettmer told Povich. (Minnesota taxes this income.) Military retirees “are in their 40s. They are going to buy homes, they are going to buy vehicles and buy groceries. They bring economic value to your state. The skills they have learned through 20-plus years in the military can be transferred to civilian jobs,” he added.
Tax Analysts’ deputy publisher David Brunori acknowledged that exempting military pension income is good politics, but questions whether retirees need a tax cut. "Some veterans go on to make a lot of money in the private sector and end up pretty well off. There is no reason in the world to exempt their income from tax,” he told Povich.
Connecticut also enacted other laws benefiting the states’ veterans. For more information, see Acts Affecting Veterans and the Military (OLR 2015-R-0158).