The state Legislature is currently considering legislation to exempt most or all Social Security benefits from the state’s personal income tax. It’s one of several bills that proponents say would help New Mexico’s low-income seniors. Unfortunately, the legislation is poorly targeted and would mostly help seniors like myself – in other words, people who aren’t low income and don’t need help. If we truly want to help low-income seniors, we have much better, more effective tools.
Proponents say the money from Social Security benefits was already taxed when it was earned. This is largely untrue because very little of the money delivered to seniors in their monthly Social Security checks is money they paid into Social Security when they were younger.
About half of all seniors pay federal income taxes on their Social Security income — these are seniors whose incomes are more than $25,000 a year if they are single and $32,000 if they are married. But even for these seniors, just 85% of their Social Security income is taxable under federal tax laws. Why 85%? Because the federal government estimates that 85% of the Social Security payments a person receives comes from a source other than that person’s paychecks. In other words, just 15% of the Social Security benefits that seniors receive comes from the payroll deductions made from their paychecks while they were working. The rest of the money comes from payments made by employers – who match employee contributions – and interest income earned on the Social Security trust fund’s multi-trillion dollar reserve.
So if 85% of the Social Security income you receive wasn’t money you earned when you were working, you couldn’t possibly have already paid income tax on it. And just like your 401(k) or other retirement income, you aren’t paying income tax on it until you get it. If the federal government identifies Social Security benefits as taxable income, why shouldn’t the state of New Mexico?
Of course, proponents of this legislation have other arguments for not taxing a senior citizen’s Social Security benefits – but those don’t hold up to scrutiny either. A small fraction of the millions of dollars in lost revenue would go to help low-income seniors. Most of the value of this tax break, 85%, would go to those making more than $50,000. And 64% of the money from the tax break would go to those making more than $75,000.
Another argument (is an) offshoot of the completely discredited trickle-down theory “cut their taxes and they will come.” Weather and the cost of living are much bigger factors in where seniors retire, and since those are two factors on which New Mexico does pretty well, we’re already attracting more seniors than most other states.