Why States Are Rushing to Give Tax Breaks to Military Retirees
Policy + Politics

Why States Are Rushing to Give Tax Breaks to Military Retirees

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A tax battle is brewing across much of the country as lawmakers in at least 19 states are considering creating or expanding a tax break intended to attract veterans by exempting military pensions from state taxes.

Currently, 15 states allow for military retirement pay to be completely exempt from taxation. Connecticut is the latest to join that list with the passage of its budget this week, after Gov. Dannel P. Malloy struck a deal with legislative leaders to raise the state’s exemption for military retirement pay from 50 percent to 100 percent. Other states now considering similar proposals include Minnesota, Maine and Rhode Island. Veterans would still be paying taxes on income apart from pensions, no matter the state.

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Supporters of the exemption in Connecticut and elsewhere say the economic benefits of attracting highly skilled and trained veterans with strong leadership qualities outweigh whatever tax dollars will be lost. A more highly skilled workforce could in turn help attract companies that rely on such workers, they argue. Educational institutions and high-tech corporations, for example, need employees with skills many veterans possess.

On top of that, military-friendly tax policies may also demonstrate to veterans that a state is actively working to protect any military base from closure. Many veterans look for work on military installations. And, of course, the tax exemption is also an obvious way to express gratitude to the armed forces and reward vets for their service.                                                                                                     

Some critics have questioned whether veterans should be getting this type of preferential treatment, while others have raised concerns that retirees who receive pensions might find this unfair and unwarranted preferred treatment. And the costs to state budgets, while unlikely to be high, come at a time when many states are already contending with fiscal crunches and their own pension funding shortfalls. In addition, the lost tax revenue could rise, at least incrementally, as more and more of those who served during the recent military buildup retire after putting in 20 years.

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It’s also unclear whether exempting military pensions from taxes actually has an impact on where veterans decide to live. In 2001, Wisconsin enacted full exemption for veterans, while neighboring state Minnesota only offered a $750 tax credit. Minnesota legislative researchers found that since 2001, Wisconsin’s military retiree population had little change in percentage terms compared with Minnesota’s. However, the veteran population of Minnesota is lower than in Wisconsin, showing that fewer veterans chose to live in Minnesota after initial retirement from the military.

That hasn’t kept other states and politicians from pushing the expanded tax break. Iowa last year raised its tax exemption for military pensions to 100 percent. “We’ve ensured that veterans leaving the service have boundless opportunities to live, work and prosper in Iowa,” said Iowa Governor Terry Branstad in his Condition of the State address in January.

The hope is that the tax break can help reverse the tide of younger workers leaving Iowa to look for job opportunities elsewhere. Attracting veterans would add workers to the shrinking job force. The change will cost the state about $9 million a year, a “relatively immaterial” portion of the $6.06 billion state budget, says Keith Brainard, research director of the National Association of State Retirement Administrators.

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In Maryland, newly elected Republican Gov. Larry Hogan originally pushed for a full tax exemption for veteran pensions. In a compromise measure signed into law last month, the state increased its $5,000 tax exemption on military retirement pensions for those 65 and older to $10,000. 

“Signing this bill is not only the right thing to do for our men and women in uniform, but it will also encourage more people to live and retire in our state,” Hogan said in a press release at the time. “It’s a small token of the respect and appreciation we have for their service and sacrifice.”

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