Tax breaks can be well targeted or poorly targeted. Unfortunately, many tax breaks for seniors fall into the latter category, as a new report by the Center on Budget and Policy Priorities explains. One of those is Oregon’s homegrown tax break for Social Security income — a tax subsidy Oregon ought to reconsider.
The U.S. population — and even more so the Oregon population — is greying. More than 1 in 5 Oregonians (21 percent) are expected to be 65 or older by 2028. This trend will pressure Oregon’s budget with increased needs for health care and other services for seniors. Tax breaks benefitting seniors, which reduce available revenues, will further ratchet up the pressure.
Certainly, tax subsidies are crucial for many seniors living on fixed incomes. Low-income seniors struggling to afford prescriptions, nutritious meals, or stable housing warrant targeted tax support, which helps them remain independent and healthy.
Some tax breaks for seniors, however, mainly flow to high-income seniors who do not need the help. One example of this is the exemption of Social Security income from personal income taxes. There are two halves of this exemption, one an Oregon replication of the federal exemption and the other an additional Oregon exemption that goes beyond the federal tax break.
The federal tax code (26 U.S. Code § 86) exempts some Social Security income from personal income taxation, which Oregon’s tax code mimics (ORS 316.048). Seniors pay no taxes on Social Security income when their adjusted gross income plus half of Social Security benefits and other tax-exempt interest income add up to less than $32,000 for joint filers ($25,000 for single filers). This tax exemption gradually shrinks as income rises.
Oregon law goes one further, exempting all Social Security income (ORS 316.054). Oregon gives out this tax break regardless of the taxpayer’s income.
The combined federal and state Social Security exemptions add up to more than $1.6 billion in lost tax revenue to the state of Oregon for the 2019-2021 budget period. That costs the state budget more than the revenue the corporate income tax or the Oregon Lottery will bring in.
While the federal exemption is more targeted at low- and moderate-income seniors, the state exemption provides no benefit to the lowest-income seniors, but does provide tax benefits to high-income seniors. Combined, these two tax breaks subsidize the richest 20 percent of Oregonians to the tune of $206 million in the 2017 tax year.
Poorly targeted tax breaks do not serve Oregonians — including vulnerable seniors — well. Oregon should better target the tax exemption for Social Security income.
