Retiree Tax Cut Deal Is a Missed Opportunity to Help Low-Income Seniors

March 31, 2022 by Christopher Meyer in Blog, Budget and Tax

Lawmakers reached an agreement with Gov. Hogan last week to create a new tax credit for individuals over age 65. The deal avoids major flaws in the governor’s original tax cut bill and in that sense is a significant improvement. However, even the improved plan does little for the subset of Maryland seniors who are truly struggling financially and costs the state more than $1.5 billion in lost revenue over five years. Moreover, the deal was negotiated entirely behind closed doors and offered the public no meaningful opportunity to weigh in. While the General Assembly is unlikely to change course now, they should have made better choices at earlier points in the process:

  • Legislative leadership should have allowed more time for public input on the compromise. Although the bill serving as vehicle for the plan went through committee hearings in February, the current, dramatically redesigned version received preliminary approval before text was even made public – making it impossible for anyone but insiders to weigh in.
  • Lawmakers should have done more to target savings to seniors living on low incomes by making the tax credit refundable. With adjustments to the bill’s other parameters, this could have been accomplished at little to no extra cost.
  • Lawmakers should have considered rejecting tax cut proposals altogether. Seniors in Maryland already receive multiple tax advantages, and we continue to underinvest in a range of public services that older Marylanders rely on.

Here’s what the tax cut deal would do:

  • The revised legislation creates a credit against the state income tax for individuals ages 65 or over with federal adjusted gross income less than or equal to $100,000 and married couples with income not exceeding $150,000.
  • The credit is equal to $1,000 for individuals or married couples in which only one spouse is at least 65 years old. For married couples in which both spouses are at least 65 years old, the credit is worth $1,750.
  • The credit is not refundable, meaning that individuals who owe less than $1,000 in state income taxes (or couples who owe less than $1,750) receive only a partial credit. Anyone who does not owe any state income taxes (such as those whose income is not high enough to trigger income tax responsibilities) do not qualify for any credit.
  • The value of the credit is temporarily reduced in years when state revenues fall significantly below expectations.

This plan is a major improvement over Gov. Hogan’s original proposal, which would have eliminated state and local income taxes on most seniors, costing state and local governments nearly $3 billion per year once fully phased in. More than half of the tax cuts in the original bill would have gone to the 7% of individuals with income over $200,000. The current deal is not nearly as lopsided, primarily benefiting the 55% of families with income between $52,000 and $301,000.

A Missed Opportunity

However, the seniors who truly need help would get next to none under the compromise plan, with only 0.1% of benefits going to those with income under $28,000. This is because the credit’s nonrefundable design prevents low-income families from claiming the full benefit.

A modified version of this plan would deliver much more significant benefits to seniors who truly need help, with little change in the cost:

  • Make the credit 100% refundable, allowing families with low incomes to claim the full benefit
  • Reduce the value of the benefit to $500 for individuals and $875 for married couples
  • Keep the current eligibility thresholds ($100,000 for individuals, $150,000 for married couples): Cost increases by 3%
  • Reduce eligibility thresholds by half ($50,000 and $75,000): Cost decreases by 14%

Either of these alternatives would deliver at least $500 in annual tax savings to the low-income seniors who need help the most.

Is it Worth the Cost?

Even an improved, refundable retiree tax break would use up resources that could otherwise fund public services older Marylanders rely on. Our state’s current, sunny fiscal climate will not last forever, and we risk wasting an opportunity to rebuild basic services we have allowed to erode:

  • Policymakers responded to fiscal challenges in the early 1990s and after the Great Recession by slashing state funding for local public health departments, leading to staff cuts, pared back services, and increased fees. So, far, 85% of Marylanders who have died of COVID-19 are at least 60 years old.
  • Population aging in Maryland is driving a rapidly growing need for long-term care, a large portion of which is funded through Medicaid with significant state support. However, low wages and poor working conditions contribute to persistent workforce shortagesin the industry. Tax cuts would put downward pressure on state Medicaid spending, making it harder to pay a competitive wage to the care workers our state will need as our senior population grows.