Better target senior tax breaks

Why should a senior retired couple pay less income tax than a working couple with similar or even less income? That can be the situation in Iowa, and many other states.

Also see Iowa Fiscal Partnership news release

A new paper about state tax breaks for seniors shows one reason pre-2020 chatter about new tax breaks in Iowa is a bad idea.

Elizabeth McNichol of the Center on Budget and Policy Priorities (CBPP) notes in her report Wednesday that special income-tax breaks for seniors cost states 7 percent on average in 2013, a figure that will rise with growth in the population over 65.

As McNichol notes, “The senior tax breaks are poorly targeted because of their design: most states provide them regardless of the recipient’s income or savings.”

Put another way: Why should a senior retired couple pay less income tax than a working couple with similar or even less income? That can be the situation in Iowa, and — as McNichol notes — in many other states as well.

It is a point Peter Fisher and Charles Bruner have made in Iowa Fiscal Partnership (IFP) analysis over the years about Iowa’s special breaks for pension income, and as legislators phased out what had already been a limited tax on Social Security income.

Already, Iowa has freshly passed, costly and inequitable tax cuts scheduled to be phased in over the next few years, yet state legislators just last week were talking about bigger cuts in 2020. Given attempts to expand senior breaks in 2018, but not adopted in the final package, there is a danger that new income-tax cuts in 2020 could include the new senior breaks.

Among changes considered in 2018 was an expansion of Iowa’s already generous pension exclusion from $6,000 (single) and $12,000 (couple) to $10,000 and $20,000, respectively.

McNichol’s paper notes Iowa is one of 28 states that already completely exempts Social Security income from tax, and one of 26 that exempts at least some pension income.

Iowa, in short, is already quite generous to retirees. Also as McNichol notes, for some this might make sense — seniors at low incomes. But not all.

“A large share of these costly breaks go to higher-income seniors who need them the least. States should reduce this expense by better targeting relief to seniors with low incomes,” she wrote.

Bruner and Fisher noted this problem in their IFP paper last year:

Iowa has adopted a number of special provisions benefiting seniors. While the elderly and disabled property tax credit is available only for those with low income, the other tax preferences are not based on ability to pay:

•   All Social Security benefits are exempt from tax.

•   The first $6,000 in pension benefits per person ($12,000 per married couple) is exempt from tax.

•   Those age 65 or older receive an additional $20 personal credit.

•   While non-elderly taxpayers are exempt from tax on the first $9,000 of income, for those age 65 or older, the exemption rises to $24,000. For married couples, the threshold is $13,500 for the non-elderly, but $32,000 for seniors.

Iowa Fiscal Partnership analysis of tax policy and tax proposals is always grounded in fundamental principles of taxation, among them fairness: Similarly situated taxpayers should be treated similarly in tax policy.

What matters more to measure a taxpayer’s ability to pay is the amount of income, rather than its source. To tax income from wages at a higher rate than retirement income violates that principle.

Mike Owen is executive director of the nonpartisan Iowa Policy Project and director of the Iowa Fiscal Partnership, a joint effort of IPP and the nonpartisan Child and Family Policy Center in Des Moines. mikeowen@iowapolicyproject.org

Author: iowapolicypoints

The Iowa Policy Project is a nonprofit, nonpartisan organization that provides research and analysis to engage Iowans in state policy decisions. We focus on tax and busget issues, the Iowa economy, and energy and environmental policy. By providing a foundation of fact-based, objective research and engaging the public in an informed discussion of policy alternatives, IPP advances effective, accountable and fair government.

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