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After at least eight tries in the Legislature, California may finally join every
other state in providing at least some tax exemptions for military
retirement income, which supporters argue will help veterans stay in the
state and contribute to a skilled workforce.
Assemblymember James Ramos has introduced, for the third time, a bill
that would allow veterans to exempt up to $20,000 of their federal
pensions if they make under $125,000 a year. He narrowed his bill from last
year that sought to exempt a veteran’s full retirement income. Sen. Kelly
Seyarto, a Republican from Murrieta, introduced a similar bill in the
Senate.
Overall, about 1.4 million veterans live in California, of whom 141,000
receive military retirement income, according to the latest data available
from the U.S. Department of Defense. Another 26,000 Californians receive
survivor benefits.
Ramos said the state would benefit from keeping veterans in California,
where they might work in other industries after retiring from the military
and further contribute to the tax base. California is home to the Navy’s
Pacific Fleet and tens of thousands of Marines at Camp Pendleton.
“They bring tested job expertise to our California workforce, they live in
our communities and serve as volunteers and leaders,” said Ramos, a
Democrat from San Bernardino. “California can’t afford not to put out the
welcome mat for our veterans.”
The goal of both bills, the legislators say, is to try to keep more military
retirees in California. The state has seen its retired military population
decrease due to out-of-state moves and deaths by about 28% from more
than 195,000 in 2000 to just over 141,000 in 2022, according to data from
the U.S. Department of Defense. California’s rate of decline during that
time was second only to the District of Columbia, where it declined by
35%.
Data was not available on the employment rate among military retirees —
those who served at least 20 years. But among the broader group of
veterans aged 35 to 64, about 96% of those still in the labor force in
California were employed, according to data from the Bureau of Labor
Statistics.
‘The primary factor is cost of living’
Veterans leave the state for many reasons, “but the primary factor is cost
of living,” David Boone, president of the San Diego Military Advisory
Council, testified at a recent state tax and revenue committee hearing on
Seyarto’s bill.
“The states that are gaining veterans have developed strategies to target
and attract veterans to their state,” he said.
Military retirees in California receive approximately $29,000 each
annually — a total of about $4 billion a year as of 2022, according to the
Department of Finance. Surviving relatives of veterans receive a combined
$400 million.
If the tax break became law, California would lose an average of $600 in
income tax revenue from each of the 130,000 eligible veterans, according
to the Legislative Analyst’s Office.Gov. Gavin Newsom is proposing a
similar idea through his budget proposal. His office estimates it would cost
the state about $130 million in the next fiscal year, and $85 million each
year after that.
But the financial incentive might be too small to convince retirees to stay
in California, the Legislative Analyst’s Office noted, doing little to achieve
the state’s goal of making the state a more competitive destination.
That’s the case for Sue Johnson, a former Californian who retired in
Nevada after serving 27 years in the Air Force and the Air National Guard.
“Even if it passes, I don’t think at this point that it’s enough,” she said.
“Both for my husband and I … We both had nothing and we’ve worked
hard our whole lives, but then to get to the point where that is not
recognized in the state policies … It’s just too much.”
Teachers, firefighters, police might like a tax break
Staff on the Senate’s committee on revenue and taxation also raised a
concern that Seyarto’s bill might set a precedent for other professions.
“If the Legislature exempts retirement income for one line of work that
provides a direct benefit to the public, why should it not extend the same
treatment for other commendable professions, such as teachers,
firefighters, or police officers? This may lead to a slippery slope where
retirement income from other professions is excluded from gross income,
thereby eroding the income tax base,” the committee’s consultants wrote.
Military retirees and surviving relatives pay state and federal income taxes
in California, but receive exemptions on military death benefits paid to
qualified survivors, pay for time served in combat zones and partial
property tax exemptions.
Of the 41 states that have a state income tax, 25 states fully exempt
military retirement income, and the rest partially exempt it.
The state analyst said California could see a non-monetary value to the
proposal, though: It “would no longer be the only state that fully taxes
military retirement income. In this sense, although it is a small financial
incentive, the proposal may well improve veterans’ perception of
California.”
By Sameea Kamal CalMatters
