Newstrack: Taxes out on Social Security for seniors

Background

DES MOINES — Elderly Iowans on fixed incomes have one less thing to worry about, thanks to a phase out of the state income tax on their Social Security benefits, backers say.

Former Gov. Tom Vilsack and the 2006 Iowa Legislature agreed to exempt Social Security proceeds from state taxation. But the change was spread over nine years to help the state treasury absorb the estimated $118 million reduction in tax collections.

The phaseout became final with the 2014 tax year and the state stopped taxing military pensions.

'Older Iowans rely heavily on Social Security as evidenced by the fact that absent Social Security, 47 percent of Iowans who receive payments would fall below the federal poverty level,' said Kent Sovern, AARP Iowa state director. 'In addition, Social Security makes up more than half of the household income for six in 10 Iowans and is the only source of income for 25 percent of recipients.'

During the 2010 gubernatorial debate, then-candidate and now Gov. Terry Branstad said he would be open to a similar phase out of state taxation on other pension and retirement benefits. But no proposals have been made as state elected officials struggle to meet commitments already in place to cut business property taxes, expand health care coverage and fund school reforms.

What's happened since

Branstad spokesman Ben Hammes said 'fully understanding budget implications that this may have, the governor's position has not changed. However, Gov. Branstad would reserve judgment on any piece of legislation until he saw it in its final form.'

Iowa currently exempts the first $6,000 for single filers and $12,000 for married couples in qualified retirement income from the state income tax that applies to traditional pensions, annuities and distributions from Individual Retirement Accounts (IRA) and deferred compensation plans. To qualify, the taxpayer or the taxpayer's spouse must be 55 years or age or older, or disabled, or a surviving spouse or a survivor having an insurable interest in an individual who would have qualified for the exemption during that tax year, according to state regulations.

Sen. Joe Bolkcom, D-Iowa City, chairman of the Senate Ways and Means Committee, said Iowa has a competitive tax structure for seniors now that the Social Security exemption is in place and he hasn't seen any proposals to go beyond existing provisions.

'It was a very significant tax cut that has resulted in benefits to those seniors. At the same time, it has taken revenue from the state and in some ways undermined our ability to fund some of our education priorities,' as well as some of the services that seniors need to stay independent in the homes, he said. 'Our Medicaid budget is a growing budget, and one of the reasons is we have an increasing number of seniors that need our support under that program.'

Proponents argued the tax change would stem migration — the net loss of Iowa seniors — but Mike Owen, executive director of the Iowa Policy Project, said his group's research indicated that was small and it did not make sense to attribute it to tax on retirement income. Several state agencies also found no evidence that taxes mattered in the migration of seniors in Iowa and surrounding states to the warm-weather states of Arizona and Texas.

Bolkcom said proximity to family and friends were strong factors when seniors consider where to live in retirement.