PostDoc19-02: The Impact of State Income Tax Breaks for the Elderly on Income

Abstract

States have a long history providing personal income tax exemptions/deductions/credits for retirement income. State policies on retirement income exclusions vary substantially but have one or both of two purposes: to protect the income of taxpayers who exit the labor force, and to serve as an economic development tool through attracting retired people to, or retaining them in, a state. Such tax provisions seem to have originated years ago as a means of assisting retired public employees who received relatively small pensions. Over the years, many states have expanded tax breaks for retirement income based on either ages or types of pension plans. Much of current public finance literature focuses on the effects of aging population on the Social Security system and the effects of the federal income tax incentives on income security among elderly as well, little is known about state-level income tax breaks for this sub-population. This study provides first investigation into the behavioral responses to the US state-level pension income tax exclusion. More specifically, it addresses the questions about whether these policies have positive effects on saving for retirement, retirement income and the decision to retire.