If Gov. Larry Hogan gets his way, James M. Drake will get to retire free of state income tax. Hogan wants the state to exempt the pensions of military retirees and first responders from state income tax. But that’s news to Drake, a retired Navy Reservist who currently works as a firefighter for the federal government. (Disclosure: Drake is a friend.)
Drake, who bought a house near Annapolis several years ago, says he and his wife have been, reluctantly, considering a move to Tennessee when he retires from his firefighter job in a few years unless a measure such as Hogan’s is passed, “because they don’t mess with your retirement [there],” he says. “Maryland is a great state. And we have all kinds of history . . . and good people. I love living here, but all that doesn’t balance out against the fact that your fixed income gets pinched by the state for no apparent reason.”
In his first weeks in office Hogan has confronted a $750 million deficit. Yet he has pledged to repeal income taxes that military retirees and retired first responders pay on their pensions, plus the stormwater remediation fee (i.e., the so-called “rain tax”), personal property taxes small businesses pay, and planned fuel tax increases. To do this he has proposed cutting 2 percent from all state agencies, offering buyouts of state workers, and cutting $35 million in planned spending on education. All this, Hogan says, because he’s afraid of the state losing more people like Drake.
“We’ve had the largest mass exodus of taxpayers fleeing our state—of any state in our region, and one of the worst in the nation,” Hogan said in his Feb. 4 State of the State address. Cutting taxes—and the state budget—is the only way to reverse the trend, the governor suggests.
It’s a policy prescription similar to what Wisconsin Gov. Scott Walker implemented after his election in 2010. Walker cut $2 billion from state tax receipts, slashing the university system, environmental enforcement, and state employees to make up for the shortfall. Wisconsin’s economy has lagged its peers ever since, but Walker sees himself as presidential timber, and to burnish that image he is, again, attacking state employee unions.
The same pattern is seen in Kansas and Louisiana, where Republican governors have slashed spending and taxes in a bid to make their states “more competitive,” but have left them in deficits while the governors themselves—Sam Brownback in Kansas and Bobby Jindal in Louisiana—have made themselves more competitive in the 2016 Republican presidential primaries.
Policy is always at least partially about politics; military retirees, cops, and firefighters lean generally Republican. And that is why, after years of small incremental gains, the movement of military retirees to exempt their retirement pay from state income taxes has resurfaced.
Legislative watchers have said the governor’s pension tax breaks stand little chance of passage this year, given the budget crisis and other battles. But the measure illustrates the forces at work, both in Maryland and elsewhere, to chip away at the tax base over time while securing a smaller share of the tax burden for the relatively wealthy.
On Jan. 26 The Maryland Military Officers Association of America (MD MOAA) released a new report on the proposed military retiree tax break. An update of a similar study done over a decade ago, the report says that exempting military pensions completely from state income tax will actually increase state tax revenue by making Maryland more attractive to military retirees.
The average retired military household has an adjusted gross income of more than $128,000 which “exceeds that of all Maryland tax payers by over 43%,” the report states. “These higher wage earners represent exactly the type of individual that the State is trying to retain and attract.”
As with tax breaks for big corporations, the underlying premise is based on the old trickle-down theory: attract money by being nice to people with money.
“The study proves that the military retiree has on average a higher income than the rest,” says Harvey Kaplan, a retired Army colonel who has worked for the tax break for more than a decade. “But the whole argument is that in second careers they and their family will bring in a lot more taxes. But not if they commute. [State Comptroller] Peter Franchot told me face to face. ‘We are in economic competition with these other states. We’ve got to meet that competition.’”
(A spokesman for Franchot confirms that the comptroller, a Democrat, has long been in favor of this particular break.)
The state has for the past decade made tax breaks for relatively rich retirees more generous, the Department of Legislative Services reports. In 2006 the legislature increased the basic exemption for military pensions from $2,500 to $5,000, and removed the cap that had previously limited that exemption to enlisted retires whose pensions totaled $22,500 or less. Maryland allows retirees from the Commissioned Corps of the Public Health Service, the National Oceanic and Atmospheric Administration, and the Coast Guard Geodesic Survey the same breaks; in 2007 the legislature lifted a restriction that qualified these pensioners only if they had retired after 1991.
As did a previous report in 2005, the new report asserts that thousands of military retirees are moving out of—or staying out of—Maryland because they don’t wish to pay income tax on their pension. Pennsylvania does not tax retirement income from any source. New Jersey doesn’t either. Kaplan says that 1,900 men and women who worked in the shuttered base at Fort Monmouth now commute to the Aberdeen Proving Ground from points north.
“I meet people who retire,” Kaplan says. “They live in Pennsylvania as a retiree and continue to work in Fort Detrick either as a civil servant or as a federal contractor. We found the same thing at Walter Reed.”
The report says there are van pools to bring commuters to the state bases from out of state.
Here is the thing though: According to the report, as of 2011 there were about 53,000 military retirees living in Maryland. That’s about 10,000 more than lived here in 2000, and 4,000 more than in 2005, the last time this bill got serious attention. At that time, proponents claimed that not exempting military retirement income from state taxes would lead to a large decrease in the state’s population of military retirees.
That has not happened.
So the real question is, how many retirees did not come here just because of the tax burden, as opposed to other reasons? And would those new arrivals, by themselves, offset the tax revenue the state would lose by exempting the military pensions?
Kaplan says his group asked for such a study, heard it would cost $50,000, and that the state declined to do it.
The Office of Legislative Services had not yet published its fiscal and policy note on this year’s bill as of press time. But the note from last year’s bill—with substantially the same language—estimated a cost of $46.8 million for the first year and a half, with total state and local tax revenue losses of $286.2 million over five years.
“We said the Office of Legislative Services owed the other side of the story more diligence and attention,” Kaplan says. “They only compute the cost of the bill.”
Drake says he’s been computing his costs and benefits for a while, which is why Tennessee has been looking like his destination. “When I retire, I really don’t want to owe anybody anything,” he says. “I don’t want to have a state where the taxes continue to go up . . . continually. So I really hope that initiative goes through. I hope the state will compare the money they’re going to spend—versus what they will get if they don’t mess with my retirement.”