Oklahoma’s spending on senior tax breaks is costly and poorly targeted

Tax breaks for seniors cost Oklahoma an estimated $310 million annually and do little to help the seniors most in need, according to a new report from the Center on Budget and Policy Priorities. These senior tax breaks caused Oklahoma to forego an estimated 9.0 percent of income tax revenue in 2017, a percentage share that was more than all but ten other states. The $310 million dedicated to senior tax breaks exceeds legislative appropriations for all but six state agencies.

The Center on Budget’s report notes that senior tax breaks are poorly targeted because most states, including Oklahoma, provide them regardless of the recipient’s income or savings. In particular, higher-income seniors with pensions, annuities, or other retirement savings benefit the most from state tax breaks for retirement account income. In Oklahoma, seniors can deduct $10,000 per individual or $20,000 per couple of retirement account income, whether private or public accounts (for military veterans, the exemption is the greater of $10,000 or 75 percent of income). These deductions were worth $116.3 million in FY 2018, according to the Oklahoma Tax Commission’s 2017-18 Tax Expenditure Report. In addition, Social Security income is 100 percent deductible regardless of a retiree’s total income, as are certain federal civil service benefits received in lieu of Social Security. Together these deductions reduced seniors’ tax liability by $161.4 million.

As a result of these preferences, the report estimates that Oklahoma’s seniors’ tax liability is less than two-thirds that of otherwise comparable non-elderly taxpayers.

The report notes that offering tax breaks to all seniors, regardless of the recipients’ income or savings, may have made sense decades ago when poverty among seniors was widespread. But today, the poverty rate among seniors in much lower: just one in ten seniors live in poverty today, compared to one out of four in 1970 [see data]. At the same time, the report notes that “inequality among seniors is higher in the United States than in any Organization for Economic Co-operation and Development country other than Chile and Mexico and is growing with each generation.” These trends should weigh in favor of tax preferences that provide greater benefits to low-income seniors, unlike current policies.

Senior tax preferences, as currently constituted, also serve to reinforce racial inequality. People of color are considerably less likely to be covered by a defined benefit pension plan or to have retirement savings. As a result, they benefit less from Oklahoma’s aged-based tax exemptions on retirement income.

“The cost of senior tax breaks will continue to rise with state’s growing senior population, which is expected to grow from 15 percent of the state’s population in 2017 to 18 percent in 2030.”

The cost of senior tax breaks will continue to rise with state’s growing senior population, which is expected to grow from 15 percent of the state’s population in 2017 to 18 percent in 2030. Nationally, the cost of senior tax breaks are expected to more than double between now and 2030, when the number of Americans over 65 will increase to one in five.

The growing cost of senior tax breaks will add to pressures on the state budget in the years ahead. According to a recent report by Kent Olson, Oklahoma State University Economics Professor Emeritus, Oklahoma faces a structural budget deficit that will grow to $1.1 billion annually by FY 2030. The gap will be large enough to exact a significant toll on government-provided services – which could include larger class sizes and continued teacher unrest, higher college tuition and greater college debt, and reductions in essential medical care for physical and mental illness – in the absence of new tax increases.

As we look ahead to a growing senior population at a time of scarce resource, Oklahoma lawmakers should be giving greater scrutiny to senior tax preferences with the aim of targeting them to low-income seniors who need help the most. 

ABOUT THE AUTHOR

Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

5 thoughts on “Oklahoma’s spending on senior tax breaks is costly and poorly targeted

  1. Biggest problem is oklahoma max ta x rate is $10000 and tax giveaways to the wealthy for the last 15 years. Let’s concentrate on that first..

  2. I must admit that the issue of senior tax breaks has struck me as unfair for some time. Over the past couple of decades I have prepared my own tax returns, and also those of my son. Both my wife and I are in fixed pension plans as well as social security — while my son goes to work every day. The first thing you see on my state income tax return is that $40,000 ($10,000 each for our 2 pension payments and 2 social security payments) just disappears right off the top. As a result we typically ended up paying only a few hundred dollars a year on an income well above the state’s median family income —- and sometimes zero. In contrast my son (who has a family to feed and a house mortgage) pays a few thousand dollars in state income tax.

    1. Thanks, Henry. I think you’ve nailed the problem. These tax breaks for seniors carry the price of higher taxes for others – or fewer services.

  3. Most legislative candidates in Oklahoma will lose with a platform of any significant increase of taxes on senior citizens. Even those voters who are not elderly are likely to have an elderly family member here.

    Of course, this article avoided the very important matter of exactly what changes OKPolicy wants to see. Do you want some Social Security taxed? How much? Do you want to lower the pension exemption? Again, how much?

    Also, the article did not give details on exactly what other states are doing. Some have no taxes on these retirement incomes at all. Others have even more generous exemptions on senior income. Indeed, the Kiplingers publication, which looks at all taxes seniors pay, already considers Oklahoma to currently be a state that is NOT tax-friendly to the elderly.

    Many elderly Oklahoma couples with total incomes under $60,000 and single elderly individuals with incomes under $30,000 do benefit from the current system and very few of them believe that they should be considered wealthy. Of course, OKPolicy might respond that some seniors here might also have substantial savings. The ominous phrase “regardless of the recipient’s income or savings” appears twice in your article. Well, there currently is no requirement that the great masses of the American people must give an accounting of their total household savings. To create such a requirement would result in much bitterness and resistance, as well as creative ways to try to avoid a high wealth tally.

  4. And some believe that we should do away with state tax here in Oklahoma for seniors that are retired like Texas and Florida Oklahoma should be happy with the taxes that are getting from seniors if not we can move and spend our money elsewhere and then no state tax at all to.

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