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Tax breaks for seniors a bad deal?

States are competing to provide the best tax environment for retirees. But that generosity could cost all the taxpayers later.

By MSN Money Partner Mar 13, 2012 1:31PM

This post is by Howard Gleckman at


We’ve all seen the articles in Forbes, Kiplinger's Personal Finance or U.S. News trumpeting the best states to live in for retirement. A key measure for them all: low taxes. What you may not know is that states actively compete with one another to provide tax breaks to older residents -- especially to wealthy seniors.


This competition is similar to the way states use tax subsidies to woo businesses. It may not make much sense, but it sure is trendy.


For instance, in 2010 the Georgia Legislature voted to exempt nearly all retirement income from taxes starting in 2016. Last year, the governor of Maine proposed making all pension income tax-free.


Not all states are headed in this direction. Michigan, which is in deep financial distress, recently rolled back some generous tax exemptions for pension income. But nearly every state offers some tax breaks for seniors. (Post continues after video.)

Why? Many seniors have plenty of money to spend, including Medicare dollars and Social Security and pension benefits. Just as important, they use relatively few state and local services: The elderly don’t need K-12 education and spend relatively little time in jail. And their health care is largely funded by the federal Medicare program.


This tax race for seniors is described in a fascinating new paper that Karen Smith Conway of the University of New Hampshire and Jonathan Rork of Reed College presented earlier this year at a Tax Policy Center/UCLA Law School conference on state taxes.


States offer seniors three buckets of tax breaks. They exclude some or all Social Security benefits from tax; grant seniors extra deductions, exemptions or credits; and exempt at least some pension income from tax. Combined, these preferences cost states more than $24 billion annually. The biggest beneficiaries are middle- and upper-income elders -- the very people states want to keep or attract.


For instance, Conway and Rork found that 12 states offer a modest tax exemption for pension income, three exempt income of $70,000 or more, and five exempt all pension income from tax.


Conway and Rork quote former Georgia Gov. Sonny Perdue, who said his state’s plan to eliminate taxes on retirement income "will help attract retirees to our state and make our economy even stronger."


Is he right? Do low taxes attract seniors and are they worth the revenue cost? Lots of prior research suggests Perdue is engaged in little more than wishful thinking. Last year, less than 1% of seniors moved from state to state after age 65 for any reason. And very few appear to do so to reduce their taxes.


This limited mobility may result in another major downside for states. About 70% of seniors will eventually require long-term-care services in old age, and 20% will need this assistance for five years or more.

Many are middle-income seniors who spend down their assets on personal care and eventually become eligible for Medicaid. About one-third of Medicaid dollars are spent on long-term-care services, and the program is a growing burden on state budgets.


Thus, while states may benefit in the short run from attracting a few relatively young, healthy and wealthy pensioners, they may end up paying a substantial price when middle-income seniors become frail, go broke and require Medicaid long-term-care services.


When that happens, states such as Georgia may regret giving up revenue to subsidize seniors. Of course, the price for that mistake will be paid by some future governor who has the misfortune of serving years from now.


More from Forbes and MSN Money:





Mar 13, 2012 5:29PM

Rather than pour more money down the tax rat hole, Georgia is very Senior friendly.  We do have a relatively high sales tax that hits everyone.  This is the right way to collect taxes. 

By being careful I can buy, and do buy Long Term Care for me.  It allows me to take care of myself and still stay in my house while I wait to be institutionalized.  If we need government interference with Seniors liquidating their assets to avoid having to pay for Long Term Care, it would probably be a good bet.  Your crystal ball is cloudy, it does not allow for Seniors ability to make money during retirement and it assumes that everyone is out to shaft the government, if they can.  When people make money they pay taxes in one form or another.  I have been retired for 9 years and the state has not spent a cent on my health care, or anything else.  When you say that no one moves to avoid taxes, I think that most of the people that I know are from New York, New Jersey, Pennsylvania, and other high tax states, they all say the same thing and that is that the taxes are oppressive.  

Mar 15, 2012 12:51PM
There's a hell of a lot of seniors living at the poverty level with very small retirement income including Social Security. Are we going to criticize them too for not paying taxes. Maybe they have no money left for taxes!
Mar 14, 2012 7:02PM
Many Seniors cannot sell their homes at this time preventing a move to another state.
Mar 14, 2012 8:29AM
I'm not sure it is entirely accurate to say that seniors do not move to lower tax regions.  Taxes may not be the only factor, but is a factor.  Florida sees many retirees - climate is part of the reason, but the tax structure has to be an incentive.  Before the housing bust, the realtors here in Tennessee noted that the often showed property to people looking to move from high cost & high tax places such as California.  They could cash in their expensive real estate and buy here at less than half the housing cost, pocketing the cash and keep more of their retirement income as Tennesse taxes only interest and dividend income received outside of a tax deferred instrument such as a 401(k).
Mar 18, 2012 1:40PM
If any class of citezens have some wealth the liberls want to take it.  Most seniors have worked hard to accumulate what wealth they have and have already paid taxes on income before savings and investments.  What is it about liberals that want to take wealth from the private sector where it is productive and give it to government that will just waste it through inefficiency and fraud?
Mar 15, 2012 10:12AM

  We made the move a  little over eitht years ago from a town in southeast Kansas to a town in southwest Missouri.  Total distance about thirty miles.  It's forty five muinets to our kids in Kansas and I estimate we have saved over twenty five thousand dollars in taxes, utilities, and insurance premiums.

Mar 20, 2012 4:58PM

States with attractive living conditions may get negative outcomes when they offer special tax breaks on pensions and real estate to attract seniors from elsewhere. Hawaii is prime example.  They have a high income tax on earned wages and none on pensions and social security.  In addition they have very low property taxes for everyone relative to the value of their housing.  Well-off retirees with mostly pension source income often pay no state income tax and pay taxes on their high value houses that are lower than they paid on pre-retirement houses with half the valuation in the lower 48.  Their school system and other public services suffer as a result.  School improvements, stimulus to create jobs, and support to make housing affordable are desperately needed to stop a serious exodus of productive people from the state.  Retirees will come anyway for the weather,  They should pay state income taxes equivalent to workers to improve the sustainability of the state's economy.  Also, taxing pension income like earned income might raise enough revenue to avoid raising property taxes which lower income people there simply can't afford.  .  

Mar 19, 2012 4:15PM
I moved out of the U.S. and pay no state income tax.  Problem solved. Dropped Medicare Part B, took the local mandatory healthcare plan at $49.00 a month.  No heat, no a/c, no problem.
Mar 16, 2012 3:18PM

I think this all can be settled if we had a flat tax.

Everyone will be treated as equals and no chetting can be done



Mar 25, 2012 1:42PM
To say a state gives seniors a tax break only because it wants to attract migration from other states is not completely correct.  They also want to keep seniors from leaving.  A state is far better off keeping its relatively wealthy, well-established, residents than they are losing them to another state.
Mar 19, 2012 4:58PM
I wouldn't want to live in any state with low taxes.  That usually bad, state services.
Mar 16, 2012 11:52AM

First let me say I do believe the federal government and state governments are/have been giving too many breaks to seniors at the expense of the young workers. A lot of this has to do with the gray voter turnout or in short buying the vote. Let me give a good example of what occurs in my home county in Florida. A couple, both over 65, drawing $25,000 per year in social security benefits and a pension of $19,000 per year. Fifty percent of their SS plus their taxable pension is less than $32,000 so none of their SS is taxable and their AGI is $19,000. Their standard deduction and 2 exemptions is $21,300 which means they pay Zero federal income tax. Because their AGI (Adjusted Gross Income) is less than $22,000 they qualify for poverty level tax exemption of $800 on their home real estate tax. The short answer is the couple have a total of $44,800 spendable money.


Now let's compare the above with a 30 year old couple with 2 kids. To have the same spendable money the young couple would need to have an annual salary of $55,000.


In my opinion the system isn't fair when all sources of income are not counted. The number of people living in poverty is high because all sources of income is not counted such as VA benefits, food stamps, disability benefits, Medicaid, free school lunches, free cell phones, housing, non taxable SS and the list goes on.


IMO one way to correct the situation is ALL (100%) of SS payments be taxable after the person has received what they contributed. For the average person that would occur after 13 months.


For the records my wife and I would be paying more income tax, we are both 75 years of age have been drawing SS for over 10 years.  

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