Yes, Veterans Should Pay Taxes. And We Do!

Alec MacGillis argues for Slate that "Veterans Should Pay Taxes Like Everyone Else." I agree!

veterans-old-new

Alec MacGillis argues for Slate that “Veterans Should Pay Taxes Like Everyone Else.” As a veteran who has paid taxes just like everyone else for the 23 years since separating from the military, I’d say we do and agree that we should.

Apparently, though, “A growing number of states have moved to, or are considering, exempting military pensions from state income taxes. As the Wall Street Journal reported on Thursday, no fewer than 19 states are now considering legislation to create or expand tax breaks for veterans, with 65 bills toward that end pending in state houses.” Furthermore, “Already, nearly half of all states don’t tax military pensions at all (this includes the seven states that don’t tax personal income, period), and 20 more states partially exempt them; there are only seven states left with no exemption for veterans. ”

MacGillis is conflating veterans—those who simply served in the military, such as myself—with those drawing pensions after 20 or more years of service or because of a service-connected disability. They’re different categories.

Now, generally speaking, I think we should tax military retirement pay and either shouldn’t tax or should means test disability benefits for veterans. MacGillis and I are more-or-less in agreement that retired senior officers, in particular, can afford to contribute to the tax coffers of the states in which they “retire” and that the arguments for treating military retirement differently from other income don’t really wash. They’re a combination of special treatment in the “Thank you for your service!” category and, more importantly, a competition for well-trained 40-somethings who have a choice as to where to settle after service and spend $50,000 or so in pension income plus whatever they earn in their follow-on job.

Not mentioned by either MacGillis or the linked WSJ piece, however, is an important fact: the exemptions applied to military pensions is generally also offered to other pensions. I’m aware of this because my late father was a military retiree and benefited from a couple of court rulings a few years after his retirement:

Federal law allows states to tax federal officers’ and employees’ pay and compensation for personal services (including pensions), “if the taxation does not discriminate against the officer or employee because of the source of the pay or compensation” (4 U.S.C.A. § 111). The U.S. Supreme Court has ruled that this law (1) bars a state from providing more favorable tax treatment for state and local pensions than for federal civil service pensions (Davis v. Michigan Department of the Treasury, 498 U.S. 803 (1989)) and (2) prohibits a state from taxing military pensions if it does not also tax state pensions (Barker v. Kansas, 503 U.S. 594 (1992)).

Though these rulings bar states from singling out military pensions for taxation when state and local pensions are tax-exempt, they do not bar states from singling out military pensions for a tax exemption. There appears to be no legal impediment to a state treating military retirement income more favorably than other pensions for income tax purposes.

My dad retired in place in Alabama, which was his last duty station, in 1983. His pension was taxed by both the Federal government and the State of Alabama, minus the 40% that came from the VA in the form of offsetting disability pension. Pursuant to those court rulings, Alabama had to stop taxing the remaining 60% of his pension because it did not tax the pensions of retired state employees. (Much later, the law was changed so that he received his disability pay on top of his retirement pension, rather than as an offset.)

As of 2005,

Despite the fact that more favorable treatment of military pensions appears to be permissible, of the 35 states that exempt some or all military pension income from their state income taxes, only four do not apply identical tax exemptions to all types of public-sector pensions (military, state, local, and nonmilitary federal). The four states with differential tax treatment for public-sector and military pensions are:

1. Indiana, which exempts $2,000 of annual federal civil service pension income from state income tax while providing no exemption for state, local, and military pension income;

2. New Jersey, which exempts 100% of military pension income while providing more limited exemptions for other federal and state and local pensions;

3. West Virginia, which exempts 100% of state and local pensions for public safety retirees while capping exemptions for other state and local and federal civil service pensions at $2,000, and exemptions for military pensions at $2,000 plus an amount based on years of service; and

4. Wisconsin, which exempts 100% of military pension income while providing no exemptions for other public-sector pensions.

I can’t readily determine the state of play a decade later. (The Internet is much more interested in the related issue of how military pensions should be treated in divorce settlements.) Given the growing pro-veteran sentiment and the aforementioned competition for their pensions and skills, I presume that there’s more disparity now. But lumping in states that have no income taxes for anyone, states who treat military pensions just like other pensions as required by law, and those who treat military pensions more favorably and treating them all as being in the third category is unhelpful to the debate.

FILED UNDER: General
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Scott says:

    A lot of these exemptions and special entitlements arise somewhat randomly as isolated “good ideas” that eventually create a system that makes no sense. However, to rationalize it after the fact is incredibly hard.

    Right now, the nation and states are showering veterans, including retirees, with all kinds of benefits including education, reduced car registrations, homestead exemptions, etc. Once in place, there is almost no chance of reversal. It’s a feel good now and resentment later.

  2. Electroman says:

    I pay income taxes on my military pension, and have no problems with doing so. That being said, most military retirees are on more limited budgets than I, since I retired as an O-6 after thirty years.

  3. Paul Weber, Capt, USAF (ret) says:

    Yes, we do pay taxes. What we don’t get is the retirement benefits (pay and health care) that were promised us when we joined.

    Our retirement pay was linked to active duty pay until around 2000. That’s when Congress took that link away and said we’d get yearly cost of living adjustments based on the Consumer Price Index, but those were typically reduced by 1 point. Between 1010 and 2013, for 4 years, we didn’t get any increase at all. Currently I’m getting ~15% less than I was promised.

    Our health care was supposed to be free. Then came the small co-pays, followed by the larger co-pays, followed by ObamaCare. My doctor was only 10 minutes away. Now the only doctor I can find on the plan is in Nashville, over an hour away.

    We kept our word, did our duty, got a pittance while we did it. You want to treat us fairly? Fulfill your obligation – provide, in full, what you promised us. That’s the bare minimum you can do to keep your honor.

  4. michael reynolds says:

    @Paul Weber, Capt, USAF (ret):

    My father retired from the US Army after 20 years. At age 39.

    39.

    He’s now 77, which means he’s been receiving a pension and health care for almost twice as long as he served. I’m proud of his service and his life, but come on, people. I’ve been working full time since age 16 which would be 44 years – no pension on the horizon. We’re getting a little bit Heinlein here.

  5. al-Ameda says:

    “A growing number of states have moved to, or are considering, exempting military pensions from state income taxes. As the Wall Street Journal reported on Thursday, no fewer than 19 states are now considering legislation to create or expand tax breaks for veterans, with 65 bills toward that end pending in state houses.” Furthermore, “Already, nearly half of all states don’t tax military pensions at all (this includes the seven states that don’t tax personal income, period), and 20 more states partially exempt them; there are only seven states left with no exemption for veterans. ”

    It’s an easy sell in many state legislatures, or in voter-initiatives, especially in conservative Sunbelt States. Who wants to be seen as anti-military? Carte blanche exemptions from taxation are quite often fiscally irresponsible.

  6. @Paul Weber, Capt, USAF (ret):

    Our retirement pay was linked to active duty pay until around 2000. That’s when Congress took that link away and said we’d get yearly cost of living adjustments based on the Consumer Price Index, but those were typically reduced by 1 point. Between 1010 and 2013, for 4 years, we didn’t get any increase at all. Currently I’m getting ~15% less than I was promised.

    Our health care was supposed to be free. Then came the small co-pays, followed by the larger co-pays, followed by ObamaCare. My doctor was only 10 minutes away. Now the only doctor I can find on the plan is in Nashville, over an hour away.

    What worker hasn’t seen their retirements benefits cut back in the last 15 years? My pension was eliminated entirely two years ago. If you want to switch, I’d be happy to take your benefits.

    Or do you just see yourself as an inherently better sort of person who deserves tribute from all the worthless peasants around you?

    Fulfill your obligation – provide, in full, what you promised us. That’s the bare minimum you can do to keep your honor.

    I didn’t promise you jack shit. If you got a problem, go talk to the people who did.

  7. Tillman says:

    Yeah, it’d be nice if we could all keep our pensions, but that’d require a lot of people dying off to become financially viable.

    Or taxes and regulations, but those are inherently evil.

  8. michael reynolds says:

    Military vote strongly GOP. They support the party that consistently undercuts pension protection, cuts food stamps, attacks social security, cuts welfare, rejects equal pay for women, rejects raises in the minimum wage. . . but Oh No, not our pensions! Not our benefits! Not our safety net!

    You don’t get to vote to screw everyone else and then complain when it’s your turn. You want 100% of what you were promised, go ask the Koch Brothers to write you a check.

  9. Mikey says:

    @Stormy Dragon: Eh, I see his point, I suppose. I mean, he’s reacting as anyone would when two parties (him and Uncle Sugar) signed a contract but only Uncle can change the terms at will.

    At the same time, though, he’s still got it immeasurably better than most everyone else. A defined-benefit pension? Retirement at 50% base pay after 20 years, when you have decades more working life left in you? Medical insurance (Tricare) that offers great coverage and costs less a year than many of us pay every month? Who gets those things? Pretty much nobody else.

    I’m a military retiree, although as a retired Reservist I don’t begin to draw full benefits until I turn 60. When I was in, I understood who had the power to change the terms and decided the only guy who’d take care of me was me. I was proud to be in the Air Force, I had one of the most incredible jobs and it set me up for a rewarding and lucrative career post-enlistment.

    Whining about retirement pay being keyed to CPI rather than active military pay just seems rather weak–and, quite frankly, entitled–in the context of all that.

  10. HarvardLaw92 says:

    @Paul Weber, Capt, USAF (ret):

    got a pittance while we did it

    Looking over the pay charts. An O-3 with 3 years of service brings home basic pay of $53,211.60.

    Add to that a tax free housing allowance of $12,308.40, and a tax free allowance for meals of $3,040.56. All officers get these.

    Add to those amounts the potential career aviation pay, hazardous duty pay, imminent danger pay. Then add in the fact that ALL of your pay is tax free when serving in a combat zone (which anybody who has ever been in the military will tell you does NOT mean being shot at. Desk drones serving in Saudi Arabia, just as an example, qualify for this exemption.)

    So, you are looking at a minimum for an O-3 (your terminal rank) with 3 years of service earning $68,560.56 per year without factoring in the tax benefits.

    An O-3 who qualifies for retirement with 20 years of service would be earning $91,733.76 per year without factoring in the tax benefits.

    Now, is that a pittance compared to, say, what I earn? Absolutely, but I think the vast majority of Americans who earn less than those figures would say that it’s pretty generous.

  11. Just 'nutha' ig'rant cracker says:

    As a general rule, I’m opposed to taxing pensions, always have been and don’t collect one yet. As I became older and noted that my fellow professor’s Korea Railway pension was larger than his or my salary as full professors at our university, I saw that my beliefs were not congruent to reality. Still, protecting those whose pensions are small from economic hardship appeals to me. So these days, I advocate some sort of relatively small exclusion for pension income. I suspect that excluding the first $10,000/year might work ok.

    Let the debate begin.

  12. Scott says:

    @Mikey: @HarvardLaw92:

    Not to pile on but, quite frankly, there are few groups with a greater sense of entitlement than veterans. The list of benefits and entitlements are much more than touched upon here. Some are even inheritable (education benefits) for use by their children.

    What grates me is how many are tea party supporters after their lifetime of being in one of the greatest socialist organizations ever devised, namely, the US Military. The irony astounds.

  13. HarvardLaw92 says:

    @Mikey:

    Retirement at 50% base pay after 20 years, when you have decades more working life left in you?

    This brings something into specific relief. Given the status of government hiring with respect to veteran’s preference regulations, at present it’s virtually impossible to be hired by the federal government unless one is a veteran. I hear anecdotal stories all the time about military retirees being hired as civilian DOD employees, often doing the exact same jobs they were doing in the military just a few days earlier.

    They collect their military pensions while also receiving civilian DOD paychecks, AND they build up FERS retirement based on their civilian service as well. The end result is someone retiring at the typical age with TWO government pensions.

    Beyond that, federal law does NOT consider military retirement or VA disability payments as qualifying income for the purpose of SS, so you have a situation where someone can ostensibly receive a full military pension AND full SS benefits.

    Even better, a disabled retiree can receive his full military pension AND his full VA disability AND his full SS disability

  14. HarvardLaw92 says:

    Add to the previous analysis TSP 401(k) accounts as well.

  15. James Joyner says:

    @Just ‘nutha’ ig’rant cracker: A lot of the states on the list do just that: exempt pensions up to a certain point. In some cases, it’s well under $10,000.

    @HarvardLaw92: I actually don’t find that problematic. People with service-connected disabilities get tax free VA benefits after even short stints in uniform. There’s no obvious reason that those who make it to 20 shouldn’t get those benefits. Yet, under the old system, they’d simply offset dollar for dollar from their pension; the only benefit was that the VA portion wasn’t taxable as income.

  16. @Mikey:

    Eh, I see his point, I suppose. I mean, he’s reacting as anyone would when two parties (him and Uncle Sugar) signed a contract but only Uncle can change the terms at will.

    I see his point too, but I think now pretty much everyone realizes any contract that offers future benefits for current consideration is susceptible to “I am altering the deal, pray I do not alter it further” situations. He seems to think he is uniquely put upon, when he’s actually made out far better than most people.

  17. HarvardLaw92 says:

    @James Joyner:

    I don’t necessarily find it problematic either. It was just a contra to the “we’re getting the shaft” position. All things considered, veterans do pretty well. Exceptionally well compared to a pretty large slice of the population, so the whole “unfair / being mistreated” meme just gets a little old after a while.

  18. David in KC says:

    I’m somewhat biased on the disability being tax free as I have a 70% disability rating from the VA and it will only go up (no cure, and will only get worse with time). At 70%, the check is a little over 3k each month. At that, I can pay the bills and save a little for the unexpected, but not much else. If it suddenly became taxable, the impact would be profound. I was in for 6 years, so no pension for me. I look at the disability benefits like disability insurance. If structured correctly, tax consequences of drawing it are minimal to non existent.

  19. Mikey says:

    @Stormy Dragon:

    He seems to think he is uniquely put upon, when he’s actually made out far better than most people.

    Yeah, there’s a whole lot of “I’m not getting what I DESERVE!!” going on.

    I never thought that way. I got to go a lot of fantastic places. I lived overseas for almost seven years, an experience I wouldn’t trade for anything. I learned a great deal and matured even more. I did things 99% of people will only see in movies. Enlisted pay wasn’t as good then as now, but it certainly kept food on the table and the cooler full of beer. And the cumulative effect of all that is a subsequent career that I not only enjoy quite a lot but allows me to support a family in the D. C. metro area on my income alone. It’s awesome.

    I didn’t feel like it every day when I was still in, but there were times I’d have paid them to do what I got to do. What kind of person whines after that? I just don’t get it.

  20. grumpy realist says:

    @Paul Weber, Capt, USAF (ret): Great, now are you willing to go support the myriads of public service employees in states like Illinois and New Jersey, who have the exact same sort of argument and are now discovering that the states want to cut back their pensions considerably?

    And how about places like Bain (Romney’s firm), which would barge in to a distressed firm, run up even more in expenses “fixing” the place, then using the financial hole it was in to declare bankruptcy and go after the set-aside pension funds?

    Aren’t they deserving of just as much protection as you are? And if not, why not?

  21. An Interested Party says:

    I wonder if as many people during the Great Depression and WW II felt like they had some kind of victim status like so many seem to feel now…I doubt they did back then…it’s especially galling when some who are so much better off than most of the population whine about how they aren’t getting their fair share…

  22. If military pensions are paid from tax money. Can it really be said that money withheld from the pension check is paying taxes? It seems to me that it just reduces the amount of their pension. The money is taken from the tax pool to pay the pensions, then a small percentage is returned to the tax pool. The veterans aren’t paying taxes. The government is just reducing their pensions through accounting trickery. If I give you a dollar and then I take back 20 cents. I haven’t given you a dollar. I’ve given you 80 cents. That’s what the government does and says the 20 cents is what you paid in taxes.