LB 64, a bill slated for second-round debate on today’s legislative agenda, is a costly measure that would give wealthy retirees a sizable tax break under the premise of keeping them from fleeing to other states. Few retirees, however, are likely to flee regardless of what happens to our tax code and those who do relocate are much more likely to do so to be closer to family, lower their overall cost of living, improve their access to healthcare or simply live in a better climate. They also are likely to spend more on moving costs than they would save in taxes.
LB 64 would have a major fiscal impact while largely benefitting high-income retirees
LB 64 would, over a period of nine years, totally exempt Social Security income from the state’s income tax. According to the fiscal note, the measure will cost the state more than $131 million annually once fully implemented. LB 64’s tax cut would predominantly benefit retirees with significant non-Social Security income. According to the Institute on Taxation and Economic Policy, two-thirds of the benefits of LB 64 would flow to the wealthiest 20% of retirees, giving around $1,500 in tax savings to those making more than $114,000 a year. That’s more than twice the median income for those over 65 in the state, which is about $48,000 — a level at which no one would pay income tax on any of their Social Security income.[1] Most Social Security income in the state is untaxed due to a preexisting exemption for lower incomes, so Nebraskans with an adjusted gross income below $59,100 married filing jointly won’t pay tax on any of their Social Security income in 2021 — and that threshold will only get higher from here on because it’s indexed for inflation annually.[2]
Retiree flight is unlikely
Academic research fails to find correlation between migration and taxes. A June 2012 paper published in the National Tax Journal found that state-to-state movement among the elderly was stable from 1970 to 2000 despite changes in state tax laws favoring the elderly. In other words, the study found that “state tax policies towards the elderly have changed substantially while elderly migration patterns have not.”[3]
Other factors influence retirement decisions, including affordability, access to health care and crime rates – all of which Nebraska scores high in, leading Bankrate to name it the best place to retire in 2019.[4] Of the roughly 570,000 adults aged 65 and older who relocated to a new state in 2018[5], most cited proximity to family, cost of living, health care and climate as the main factors influencing their decisions.[6]
Tax savings would likely pale in comparison to the cost of moving
The average retiree in Nebraska receives about $18,500 in Social Security income a year, so even those paying the top income tax rate of 6.84% on that amount would pay $1,076 in taxes on that income.[7] The average cost of an interstate move is nearly five times that amount.[8]
LB 237 a better approach to exempting special security
There’s another pending bill, LB 237, that would raise the income level at which the existing exemption kicks in. The fiscal impact upon full implementation is significantly less than that for LB 64 and so it would not only better target tax relief to those who may need it, but also protect the budget in future years when the fiscal picture may be different.
NET Nebraska will stream debate on LB 64 live and you can read more about the measure in this Policy Brief.