Contact: Jon Whiten – [email protected]
Costly and Poorly Targeted Senior Tax Subsidies Widen Economic, Racial, and Generational Inequalities
State lawmakers should focus on improving overall tax fairness, not creating special carveouts based on age
Lawmakers in several states are currently considering tax subsidies for senior citizens, even though these breaks are costly and poorly targeted. These carveouts widen economic, racial, and generational inequalities, and should be eliminated or tightened, not expanded, according to a new report released today by the Institute on Taxation and Economic Policy (ITEP).
States considering senior tax breaks this year include Kansas, Minnesota, North Carolina, Vermont, and Wisconsin. Earlier this month, Michigan lawmakers reinstated very large retirement income subsidies that had been pared back over a decade ago, while the Utah legislature expanded eligibility for the state’s Social Security tax credit (that bill awaits the governor’s signature). These developments continue a multi-year trend of enlarging tax subsidies for senior citizens.
The report’s key findings:
- Income tax subsidies for seniors are draining state revenues by roughly $48 billion – or 9 percent of all income tax revenue – in 2023. That number is likely to grow as the population continues to age unless lawmakers make needed reforms. And billions more are foregone through property tax subsidies and local income tax subsidies for senior citizens, as well as through state conformity to federal retirement savings subsidies that are excluded from this total.
- Many of these subsidies disproportionately benefit the wealthy, worsen racial inequality, create generational inequities, and weaken states’ fiscal positions without offering any meaningful upside. What’s more, they come on top of already generous tax benefits offered to many seniors at the federal level that lead to roughly 8 in 10 people over the age of 75 not paying any federal personal income tax.
- Every state with a personal income tax offers tax subsidies for seniors that are unavailable to younger taxpayers. The best academic research suggests that the median state asks senior citizens to pay about one-third less in personal income tax than younger families with similar incomes. In many states, high-income seniors pay less tax than younger families with much lower incomes.
“Your income tax bill should depend on what you can afford to pay, not the year you were born. Yet these last few years have brought an avalanche of new laws carving out senior citizens’ income from state taxes,” said Carl Davis, Research Director at ITEP and co-author of the report. “There’s no reason that wealthy seniors should ever pay less than young families with lower incomes. It’s nonsensical. We’re shortchanging future generations by skewing the tax code so heavily in favor of high-income seniors.”
The ITEP report has a detailed state-by-state breakdown on these tax carveouts for seniors. Among the key data points: 27 states offer an exemption or credit for private pension income while every state provides a substantial income tax exemption for Social Security income and 32 states exempt Social Security entirely, even for very wealthy families. Other types of tax subsidies targeted exclusively to older adults are common as well, according to the report.
These senior tax subsidies are completely unnecessary and often damaging, and most of them should be eliminated. Short of that, however, state lawmakers can reform these breaks to better target low-income and middle-class seniors by, for example, changing exemptions to tax credits and implementing sensible income limits and phase-outs for these benefits. Doing so would help contain the growing cost of these subsidies while helping to create fairer and more sustainable tax systems.