Senior Tax Breaks Don’t Attract Migrants

Those arguing for state income tax cuts often claim that such cuts will result in the relocation of large numbers of people from other states, but the economic evidence simply doesn’t support those claims. As a recent survey of the research showed, people don’t migrate much in general, and those that move do so largely for family reasons or because they are attracted by quality of life, housing costs, job opportunities or weather—not taxes.

One variant on this claim is that tax cuts for seniors will make a state a retirement destination. However, a new paper in the peer-reviewed National Tax Journal shows that those breaks also don’t work—a finding that has big implications for Kentucky given the generosity of its senior tax preferences. In the paper, Karen Conway and Jonathan Rork find that migration patterns among the elderly were not affected by changes in state tax laws designed to benefit them over a thirty year period. They write that “our results are overwhelming in their failure to reveal any consistent effect of state income tax breaks on elderly migration.”¹

A 2006 survey showed that Kentucky provided among the biggest state tax breaks for seniors. Kentucky exempts the first $41,110 of pension income from the income tax—even if the senior receiving the exemption has a high income. We also provide a senior property tax homestead exemption regardless of ability to pay, and fully exempt social security income from the income tax (15 states only partially exempt it).

Rather than resulting in economic benefits to the state (i.e., by encouraging migration), these tax breaks reduce the revenue we have for schools, health care and other needs by hundreds of millions of dollars a year. And such large tax breaks will be an even bigger challenge in Kentucky as the population ages.

Reforming the tax system means making changes that allow for a more adequate and sustainable flow of revenues for the public investments that are needed to grow the economy and improve quality of life. Reform also means asking everyone to pay their fair share. Any sensible tax reform in Kentucky should reduce senior tax preferences, particularly those given to high-income individuals who are best able to help support needed public services.