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.
[pullquote]“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.”[/pullquote]
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.