The impact of state taxes
As states look for ways to stimulate their economies, one option deserves some further examination. That option is the attraction or retention of retirees through tax policies. The basic question is should states, most notably Wisconsin, attempt to attract/retain retirees by reducing or eliminating their taxation of retirement income? Are the payoffs from being the legal residence of an increasing number of retirees worth the costs that might be involved in attracting and retaining these individuals? These are very important questions to a number of states, including Wisconsin, that do not currently have fiscal policies in place to make them appealing to retirees.
Retirees are an increasing proportion of the U.S. population, and their proportion will really begin to jump, start- ing in 2011, as the first group of baby boomers reaches 65 years of age. In 2000 only one state had an elderly (aged 65 and over) population that exceeded 17.5% of its overall population. Not surprisingly, that was Florida. But by 2025, 39 of 50 states plus the District of Columbia are projected to exceed 17.5% (Conway and Rork 2004).
Some states have already assumed that this is a group of individuals that should be attracted or retained. Two researchers (Longino and Crown 1989) termed retirees “pure gold.” Mackey and Carter (1994) wrote that “some states have recognized the possibility and are using the tax system to become retirement havens.” Retirees can move to states such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, and, like all residents, not face any state income tax. They can move to New Hampshire or Tennessee and be taxed only on dividends and interest income. Or retirees can move to Illinois, Mississippi, or Pennsylvania and be fully exempt from state income taxation of all Social Security payments and all forms of retirement income, including both public and private pension income and 401(k), 403 (b), and IRA payouts.
Seven other states fully exempt public pensions (federal, civil service, military, state and local government) but do not fully exempt private pension income. Others have more limited exemptions from income taxes (Baer 2001). In all some 35 of the 41 states with a broad-based income tax offer some form of income tax reduction to retirees. Despite this pattern six states have done nothing to treat retirees as special, and several others (including Wisconsin with its taxation of up to 50% of Social Security benefits) give only small concessions to retirees. Fifteen states, in fact, tax Social Security benefits, but not all fully tax these benefits.
Appealing as it may be to think of retirees as terrific assets for one’s economy, the picture may not be as clear as earlier researchers have stated, because retirees are not all alike. It also may not be as clear to individual retirees as to just where it is they should be locating. The confusion on the latter comes because states raise revenue in a variety of ways, and states that may have low or no income tax may have high sales or property taxes that more than compensate for the lack of an income tax. Furthermore, there may be some question as to the responsiveness of individuals to fiscal incentives and to the true benefits that are supposed to accrue to the communities that enlarge their retiree populations. And there is evidence that the young-old (65-74 year olds) behave somewhat differently from the old-old (75 and over) in their location decisions. Because of these many issues, it is important that we take a closer look at the issue of retirees as economic development generators.