THE CONSEQUENCES OF STATE TAX PREFERENTIAL TREATMENT OF THE ELDERLY

Every state offers some type of income tax break for older individuals. These often sizable tax breaks are typically justified as necessary for recruiting new retirees or preventing current residents from fleeing to lower tax states; equity considerations are also sometimes given. These policies are currently in flux; for the first time, some states have made meaningful reductions while other states continue to expand them. This research presents multi-faceted evidence on the consequences of these tax breaks. We begin by reporting the current status of and recent changes to these tax breaks. Using data from the American Community Survey and income tax liabilities generated via TAXSIM, we investigate the fiscal consequences of these tax breaks – for both the taxpayers who receive them and the states that offer them. We explore the geographic and income distribution of these tax expenditures as well and simulate the effect of several recently enacted and proposed changes. The magnitude of these consequences are then juxtaposed against recent evidence that elderly interstate migration is fairly rare and unresponsive to policy changes. The paper concludes with an overall evaluation of these policies and discusses possible reasons why these tax breaks persist and their likelihood of survival into the future.