Income Tax Breaks for the Elderly--How Did We Get Here?

Society favors the elderly in many ways. They receive movie discounts, low cost transit tickets, senior airline fares (sometimes), and a host of other discounts, particularly if one is a member of the AARP. Those who write tax law are also very kind to their elders. State and local levels of government are particularly generous and often provide credits against real estate taxes, and partial or full tax exemptions for pensions and Social Security (Penner, 2000). The Federal government does not have many tax provisions that explicitly mention age, and not all that refer to age are beneficial, but tax law clearly favors Social Security income and saving for retirement. A few other minor provisions explicitly favor the elderly, but they are used by relatively few taxpayers. There are also proposals for tax reform that would disproportionately affect the elderly, almost by accident. For example, if society decides to rely more heavily on taxing consumption rather than taxing income, retirees will see their relative burdens increase because they generally consume a higher proportion of income than workers, and sometimes they consume more than 100 percent of income. Lastly, although they are not affected by it, the elderly have a considerable interest in estate taxation. Every state that has a personal income tax offers some form of preferential treatment of elderly tax payers. In fact, our recent study estimates that nonelderly, high income households pay approximately twice as much state income tax as an equivalent elderly household (Conway and Rork, 2008a). The federal government also offers preferential treatment, although federal tax breaks tend to be more modest and have shown a consistent decline in recent years. The 2008 presidential campaigns, however, suggest a reversal in this recent trend as both candidates offered additional federal tax breaks to the elderly, the most notable being Senator Obama’s proposal to eliminate all federal income taxes on senior citizens with incomes less than $50,000. Elderly tax breaks cost the state and federal governments billions of dollars a year. For instance, a recent study found that exempting Social Security benefits from state taxation cost the state of California $850 million in 1999 (Bernstein, 2004, p. 9). With the aging of the population, the costs of these tax breaks are certainly going to increase in the future. And yet, the rationale for these tax breaks is far Income Tax Breaks for the Elderly—How Did We Get Here?