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State Revenues and the Aging Population

This article was originally published in the Winter 2016-2017 edition of PATimes, Public Service Delivery for Aging Populations.

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Katherine Barrett and Richard Greene
June 13, 2017

A few months ago, The State, a South Carolina newspaper, ran an article titled, “SC Bracing for Cost of Aging Population.” It would be reasonably easy to find similar commentary for almost all 50 states, as governors and legislators recognize that health care costs—notably from an aging inmate population in state prisons—are growing higher and higher. Indeed, the over-85 population is one of the fastest growing segments of society.

What set this article apart from most was that it recognized that the aging population hits states’ finances from two directions at once. Not only are older people likely to need more services, especially health care; they also are inclined to bring in smaller amounts of revenue dollars, largely because their earned incomes tend to decline. Equally important, many states have tax laws that do not fully cover income from Social Security or pensions. This issue is growing in significance as the makeup of the population shifts. The number of U.S. residents over 65 is anticipated to grow by one-third over the next 15 years, according to the Census Bureau.

be-imageWhile we were doing research for the Council of State Governments, Susan Brower, state demographer from Minnesota, told us, “I don’t think that people think about the revenue side of aging very often. But, it’s an issue that’s straightforward in terms of what we can expect. And, it is politically charged.” One reason this phenomenon often goes unnoticed is that few states calculate their budgets for more than one or two years out; the impact on revenues of aging does not make itself clear as it is a long-term proposition.

As The State article pointed out, “Residents age 85 and older, for example, are exempt from one cent on the dollar of the state’s sales tax. In addition, taxpayers age 65 and older can exempt $15,000 from state income taxes.”

The impact does not just come from exemptions, but from the simple fact that older people spend less. Alison Felix, vice president of the Federal Reserve Bank in Kansas City’s Denver Branch, co-wrote a paper that explained: “On average, spending by those younger than 25 and those older than 75 was slightly more than half of that of middle-aged consumers.” If the U.S. population in 2011 already had the age composition projected for 2030, the total of state tax revenues would have been lower by $8.1 billion, according to Felix’s calculations.

Of course, the underlying statutes that create tax-free income for older Americans vary from state to state.  A few examples from the National Conference of State Legislatures’ summary of state personal income taxes on retirement income in tax year 2014 are as follows:

  • In Missouri, residents age 62 and older get a 100 percent exclusion on income that comes from state and local pension plans. The first $6,000 of private pensions are not taxed. Some income limits apply and the amount free from taxation is capped at $36,442 per spouse.
  • Regardless of whether the income comes from pensions or Social Security, Virginia “provides individual taxpayers age 75 or older a deduction of up to $12,000 ($24,000 for married couples filing jointly). For taxpayers age 65-74, the $12,000 deduction is reduced and phased out at higher income levels, beginning at $50,000 for single taxpayers.”
  • A rather extreme example to be sure, Mississippi provides a full exemption for money that comes in from Social Security and from almost all pension plans.

Other factors are at play here, too. It is well documented that some states are leaning ever more steadily on so-called “sin taxes” to balance their budgets. But, older Americans tend to smoke, drink and gamble less than their younger counterparts. So, as the older population grows, the revenues from these sources will shrink.

Of course, states that tax the majority of income from pensions and Social Security may be wary of initiating new exemptions. One example is Minnesota, a state that has provided minimal exemptions. Yet the pressure to cut taxes thus far has seemed to outweigh the pressure to raise taxes on pensions, particularly military ones.

What are states supposed to do when their budgets are tight and millions of dollars in potential revenues are forgone? The simple, honest answer: very little. Older citizens tend to vote. Even a gradual increase in the taxes they pay on Social Security or pensions is the kind of thing that tends to upset people when it is time for election day.

Authors: Over the course of more than 25 years, Katherine Barrett and Richard Greene have done original research that hundreds of state and city government leaders have recognized and used. They are senior advisers to the Pew Charitable Trusts’ government performance unit; special project consultants to the Volcker Alliance; senior fellows with the Council of State Governments; senior fellows at the Fels Institute of Government at the University of Pennsylvania; and fellows in the National Academy of Public Administration. They can be reached at [email protected]

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