Christian Science Monitor, March 17, 2015
Alec MacGillis argues for Slate that “Veterans Should Pay Taxes Like Everyone Else.” As a veteran who has paid taxes just like everyone else for the 23 years since separating from the military, I’d say we do and agree that we should.
Apparently, though, “A growing number of states have moved to, or are considering, exempting military pensions from state income taxes. As the Wall Street Journal reported on Thursday, no fewer than 19 states are now considering legislation to create or expand tax breaks for veterans, with 65 bills toward that end pending in state houses.” Furthermore, “Already, nearly half of all states don’t tax military pensions at all (this includes the seven states that don’t tax personal income, period), and 20 more states partially exempt them; there are only seven states left with no exemption for veterans. “
MacGillis is conflating veterans—those who simply served in the military, such as myself—with those drawing pensions after 20 or more years of service or because of a service-connected disability. They’re different categories.
Now, generally speaking, I think we should tax military retirement pay and either shouldn’t tax or should means test disability benefits for veterans. MacGillis and I are more-or-less in agreement that retired senior officers, in particular, can afford to contribute to the tax coffers of the states in which they “retire” and that the arguments for treating military retirement differently from other income don’t really wash. They’re a combination of special treatment in the “Thank you for your service!” category and, more importantly, a competition for well-trained 40-somethings who have a choice as to where to settle after service and spend $50,000 or so in pension income plus whatever they earn in their follow-on job.
Not mentioned by either MacGillis or the linked WSJ piece, however, is an important fact: the exemptions applied to military pensions is generally also offered to other pensions. I’m aware of this because my late father was a military retiree and benefited from a couple of court rulings a few years after his retirement:
Federal law allows states to tax federal officers’ and employees’ pay and compensation for personal services (including pensions), “if the taxation does not discriminate against the officer or employee because of the source of the pay or compensation” (4 U.S.C.A. § 111). The U.S. Supreme Court has ruled that this law (1) bars a state from providing more favorable tax treatment for state and local pensions than for federal civil service pensions (Davis v. Michigan Department of the Treasury, 498 U.S. 803 (1989)) and (2) prohibits a state from taxing military pensions if it does not also tax state pensions (Barker v. Kansas, 503 U.S. 594 (1992)).
Though these rulings bar states from singling out military pensions for taxation when state and local pensions are tax-exempt, they do not bar states from singling out military pensions for a tax exemption. There appears to be no legal impediment to a state treating military retirement income more favorably than other pensions for income tax purposes.
My dad retired in place in Alabama, which was his last duty station, in 1983. His pension was taxed by both the Federal government and the State of Alabama, minus the 40% that came from the VA in the form of offsetting disability pension. Pursuant to those court rulings, Alabama had to stop taxing the remaining 60% of his pension because it did not tax the pensions of retired state employees. (Much later, the law was changed so that he received his disability pay on top of his retirement pension, rather than as an offset.)
As of 2005,
Despite the fact that more favorable treatment of military pensions appears to be permissible, of the 35 states that exempt some or all military pension income from their state income taxes, only four do not apply identical tax exemptions to all types of public-sector pensions (military, state, local, and nonmilitary federal). The four states with differential tax treatment for public-sector and military pensions are:
1. Indiana, which exempts $2,000 of annual federal civil service pension income from state income tax while providing no exemption for state, local, and military pension income;
2. New Jersey, which exempts 100% of military pension income while providing more limited exemptions for other federal and state and local pensions;
3. West Virginia, which exempts 100% of state and local pensions for public safety retirees while capping exemptions for other state and local and federal civil service pensions at $2,000, and exemptions for military pensions at $2,000 plus an amount based on years of service; and
4. Wisconsin, which exempts 100% of military pension income while providing no exemptions for other public-sector pensions.
I can’t readily determine the state of play a decade later. (The Internet is much more interested in the related issue of how military pensions should be treated in divorce settlements.) Given the growing pro-veteran sentiment and the aforementioned competition for their pensions and skills, I presume that there’s more disparity now. But lumping in states that have no income taxes for anyone, states who treat military pensions just like other pensions as required by law, and those who treat military pensions more favorably and treating them all as being in the third category is unhelpful to the debate.