Assembly leaders favor tax cuts for retirees

These could turn out to be golden years for Rhode Island retirees.
Fresh off passing an estate tax cut over the summer targeted to wealthy seniors, leaders in the General Assembly this fall have said they hope to cut taxes on a swath of retirement benefits.
Rhode Island is one of 13 states in the country that taxes Social Security income and taxes most pension benefits as well, making it a perennial cellar dweller on lists of best places to retire.
As attention this fall shifted from the election to next year’s budget, House Speaker Nicholas Mattiello announced his intention to seek as broad a tax cut on Social Security and defined-benefit pension income as the state budget can absorb.
“As we look toward the 2015 session, my goal is to address the state’s income tax on Social Security and other defined-retirement benefits to provide relief for older Rhode Islanders and encourage them to stay in our state,” Mattiello said in an email. “While this may be costly in the short term, we need to look at the long-term benefits of stimulating the economy by keeping people from leaving and making Rhode Island more tax competitive.”
While exempting Social Security is hardly a radical idea, Mattiello’s drive to include pension income in a tax deal is somewhat surprising, if only for the additional budget cost in yet another year when the state is facing deficits.
Exempting defined-benefit pension income would expand the size of the tax cut significantly, and especially boost the retirements of workers in the public sector, where defined-benefit pensions remain more common.
“My goal is to be as inclusive as possible in exempting retirement income from state taxation,” Mattiello said in an earlier statement. “Retirement income is a nuanced issue and I am looking to treat all retired persons fairly and equally. As an example, some teachers do not receive Social Security but their pensions are taxed.” Mattiello spokesman Larry Berman confirmed that the speaker does not intend to explore exemptions for defined-contribution pensions, 401(k)s, IRAs or other kinds of retirement accounts. Last year, cost estimates for a bill proposing to exempt just Social Security income projected lost state revenue at about $26 million.
This fall, Paul Dion, chief of the state office of revenue analysis, estimates that exempting all Social Security income would cost $29.9 million in fiscal 2016.
Expanding the tax cut to include defined-benefit pensions and annuities would cost more than twice as much, $73.1 million according to Dion, pushing the size of the total tax cut to $103 million.
Senate President M. Teresa Paiva Weed also supports cutting taxes on retirement benefits, although it’s unclear whether she anticipates taking it as far as Mattiello.
“I look forward to working together with Gov.-elect [Gina M.] Raimondo and Speaker Mattiello on economic-development issues, including retirement-income exemption, as part of an overall plan on the best way to move the Rhode Island economy forward,” Paiva Weed said in an email response to questions about her position on retirement taxation.
Although Paiva Weed declined to elaborate any further, spokesman Greg Pare did confirm a report in The Providence Journal that the Senate president prioritizes exempting veterans’ pensions and Social Security income first before considering other retirement income, “such as government pensions.”
On top of the direct budgetary and economic implications, potential retirement tax cuts also appear to be factoring into the politics of Rhode Island’s still-disputed pension overhaul.
Cuts to public-sector employee pension benefits are still being fought in court and in a recent interview Gov. Lincoln D. Chafee suggested pension tax cuts could be a sweetener in settlement negotiations. (An earlier settlement was approved by all but one union.) “It would be very difficult to sweeten it very much,” Chafee told Providence Business News about whether the state could improve upon the previous settlement to encourage a deal. “I will add that Speaker Mattiello has talked about reducing the tax on Social Security and maybe there is something there that helps retirees and can be tied into a pension settlement.”
Of course, if settlement talks are restarted it would be Raimondo, not Chafee, who would be leading negotiations for the state. She would also have veto power over any new tax-cut legislation.
So far, Raimondo hasn’t tipped her hand on whether she agrees that cutting taxes for retirees is a good idea in yet another year with a projected budget gap.
“As the governor-elect and her team work on the transition, analyzing the budget and addressing the expected deficit is a top priority,” said Joy Fox, director of Raimondo’s transition team in an email statement. “She intends to analyze proposals based on improving the economy and creating jobs.”
Whether a retirement tax cut passes or not, it is certain there will be questions about whether it is the best way to move the state’s economy forward.
In the effort to make Rhode Island more attractive to wealthy seniors, recent tax cuts – including lowering the top marginal income tax rate and raising the estate tax threshold – have not held much direct savings for younger and working people.
Mark Higgins, dean of the University of Rhode Island’s College of Business Administration, said cutting taxes could benefit the economy if more seniors stay in the state and spend money here.
But he said he would be wary of tax policy that targets a narrow band of the population.
“If it keeps people in the state that is good, but you have no idea if it is enough to modify their behavior or whether they spend most of their extra money here or use it to travel,” Higgins said. “It should be part of a comprehensive effort to make taxes more equitable with other states and not just something that affects seniors and not someone who is 30 years old. Maybe you also do something with first-time homebuyer tax credits and then you have broad-based reforms that you say will stay that way for a number of years.” Higgins said he would be concerned if the cut was being proposed to compensate workers and retirees affected by the pension overhaul, and thinks that would not be well-received by the private sector.
Another potential concern about tax cuts on retirement income is that it will encourage earlier retirements, particularly as labor-force participation has declined nationally and the population ages.
Currently, Rhode Island tax policy on retirement income mirrors that of the federal government, which exempts Social Security benefits for residents below a certain income level.
To determine if they meet the threshold, residents add all of their income together with half of their Social Security income. If the total exceeds $25,000 for single filers or $32,000 for married filers, then half of their Social Security benefits are added to their federal Adjusted Gross Income, the basis for both federal and state income tax. If the total exceeds $34,000 for single filers and $44,000 for married filers, they add 85 percent of their Social Security benefit to AGI.
Social Security benefits for anyone whose income is below the threshold, or represents their only source of income, are exempt.
In 2012, the last year figures were available, 64,980 Rhode Island filers (which includes joint filers) listed Social Security benefits totaling $833 million in their AGI, according to the Internal Revenue Service. •

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