March 23, 2023
March 23, 2023
This blog was co-authored by Carl Davis and Eli Byerly-Duke.
Last month the Kansas Senate voted overwhelmingly to exempt the bulk of senior citizens’ income from the state’s personal income tax. Under the bill, many high-income seniors would pay less in taxes than younger families with far lower incomes. At a cost of more than $380 million a year, this would represent a huge shift in Kansas policy and a big statement about the legislature’s priorities. Used differently, this revenue could cut child poverty in the state by 25 percent—a reform that would permanently alter the lives of many Kansas children for the better. And yet, the Senate decided that a carveout geared toward upper-income retirees, along with other top-heavy tax cuts like a flat tax, is the priority.
It would be one thing if the Kansas debate was somehow unusual, but it is not. State lawmakers across the country have been rushing to provide carveouts to high-income seniors in recent years. Perhaps the trend is a misguided and ill-targeted attempt to help lower-income seniors facing financial hardship. More likely it’s a reflection of lawmakers catering to their most vocal older constituents. Or maybe it’s a reflection of the fact that the average state legislator isn’t far from the typical retirement age themselves. Whatever the reason, the end result is disastrous, as our new report shows.
Today, every state with a personal income tax offers tax subsidies for seniors that are unavailable to younger taxpayers. We catalog them extensively in our report. 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. Overall, these subsidies disproportionately benefit the wealthy, worsen racial inequality, create generational inequities, and weaken states’ fiscal positions without offering any meaningful upside. Again and again, state lawmakers are choosing to double down with more carveouts based on the year people were born rather than the amount of tax they can afford to pay.
One of the first major state tax overhauls of the year, out of Michigan, included hundreds of millions of dollars of pension tax cuts. Minnesota lawmakers, meanwhile, are contemplating a full carveout for all Social Security income—more than half of which would flow to families with incomes over $143,000 per year because the state already exempts a large share of Social Security benefits earned by low- and middle-income seniors. Lawmakers in North Carolina, Vermont, and Wisconsin are also contemplating tax cuts for seniors this year. And a Utah bill with a regressive Social Security tax cut currently awaits the governor’s signature; 85 percent of it will go to seniors with incomes over $92,000 per year.
This frantic push toward larger tax subsidies for seniors violates an intergenerational compact. Seniors receive additional government benefits—chiefly Social Security and Medicare—which younger people must wait to receive. This is done for good reason. But, when seniors with substantial means also contribute less to funding necessary state services like roads and education, our shared investment and attachment to society is weakened. Older Americans grew up in a world with fewer state tax exemptions for pension income than we see today and benefitted from the public services that tax contributions by their elders helped make possible.
As the Baby Boomer generation demands and gets a torrent of new pension tax subsidies, the younger, more diverse generations that follow will have to endure lower-quality services, higher taxes, or some combination of these outcomes as a result. Eventually, they too may benefit from the carveouts being ushered into law today. But only after years of shouldering a larger share of state tax payments than would otherwise be the case, and only if future state leaders decide to indefinitely leave in place these highly problematic subsidies that require younger people to pay more so that seniors can pay less.
Under a well-designed income tax based on ability to pay, it is simply not necessary to offer special tax subsidies to older adults but not younger families. At the end of the day, your income tax bill should depend on what you can afford to pay, not the year you were born. It’s really as simple as that.