One of the least publicized elements of the tax revamp bill filed in the Legislature last week would wipe out one of former Gov. Sonny Perdue’s proudest legacies.
The bill would eliminate the ability of retirees to exclude nonwork income, such as investments and pensions, from state income taxes. The change would affect more than 750,000 retirees — always a powerful group of voters in Georgia.
Over the course of Perdue’s eight years in office, he twice persuaded lawmakers to cut and eventually eliminate taxes on retirement income.
In the first phase, the state exempted the first $35,000, or $70,000 per couple, from state income taxes.
Then last year, the exemption was increased. Beginning in 2012, the state will start phasing in a complete elimination of income taxes on non-work income for seniors.
Perdue and supporters hoped the measure would attract well-to-do retirees to the state, helping Georgia compete with states like Florida, where there is no state income tax.
According to the state Revenue Department, the provision enabled retired people to shield about $12 billion worth of nonwork income from state income taxes in 2009.
Roger Tutterow, a Mercer University economist who served on the tax code council, said the panel sought to create a tax system that is fair to all taxpayers.
“One could argue that excluding income for someone strictly based on their age is not treating comparable people equally,” Tutterow said.
Under the current system, he said, “You could be in a position where you could have a person in their early 60s with a very modest income paying taxes while someone who is a couple of years older, with significant income, being exempt [from taxes].
“Our preference was to treat everyone essentially the same.”
The Fiscal Research Center estimates that, when fully implemented, the current exclusion will save seniors $270 million. They would lose that exclusion if the tax rewrite plan is adopted, although the proposal also calls for lower income tax rates overall.
Eliminating the tax break would raise income taxes on some retirees, and lawmakers will think long and hard before making such a decision. Besides the policy consequences, seniors are a strong voting bloc that lawmakers won’t want to rile.
Tutterow noted, “We understand this is one of the aspects of the plan that will draw some criticism.”
Among those who think it’s a bad idea is Susan Norman of Cumming, who said her husband was able to benefit from the exclusion when he retired on disability. His private disability payments have ended, so he would not be impacted by the proposed change, she said.
But she added, “I am certain that there are many people in Georgia who receive income from private long-term disability plans who will be significantly impacted by the loss of the retirement income exclusion. These are not ‘rich retirees’ but are middle-income people who had decades-long careers and are no longer able to work due to serious medical conditions.”
Chuck Freedman, vice president of the Georgia State Retirees Association, said the average state government retiree’s pension is less than $30,000 a year. Even if, as the council’s plan calls for, the state income tax rate is dropped to 4 percent, eliminating the retiree’s exemption could cost the average retiree in the state system more than $1,000 in higher taxes.
“When you’ve got a set standard of living, that’s a huge hit,” he said. “We’re concerned about the impact on all elderly in this state, all elderly on fixed and diminished income.”
However, not all advocates for seniors supported the exclusion.
Kathy Floyd, a lobbyist for the AARP in Georgia, said her group backs the elimination of the income tax exclusion for seniors.
“We think low-income working families in their 20s deserve just as much consideration as someone who is retired,” she said. “We’re not greedy geezers.”
Floyd said her group would rather the state use the money for services to enable senior citizens to remain in their homes.
A tax break for retirees
The tax reform bill would repeal a massive tax break for Georgia retirees that was designed to attract wealthy seniors to the state. Now, the break excludes $35,000 of retirement income from the state income tax. If a couple is filing jointly and both qualify, the exclusion totals $70,000. That exclusion continues for people 62 to 65. But for those 65 and older, beginning in 2012, the exclusion increases every year until all retirement income is excluded in 2016. Below, numbers separated by a slash indicate single taxpayer/couple filing jointly.
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