Taxing Social Security Payments
Well-meaning proposals to change tax law are sometimes made without knowledge or consideration of their ramifications.
A dozen years ago, I was one of the founders of the non-partisan New Mexico Tax Research Institute expressly because lawmakers needed to be made aware of the ramifications of proposed tax law changes. Over the years, its programs twice each year are well-attended by legislators and others interested in sound tax policy for New Mexico.
A recent Op-Ed in the Albuquerque Journal by a couple of tax experts serves as an example of why proposed tax law changes should first receive careful scrutiny.
A SOCIAL SECURITY TAX BREAK WON’T HELP NM’S POOR
By JAMES O’NEILL FORMER TAX POLICY DIRECTOR, NEW MEXICO TAXATION AND REVENUE DEPARTMENT AND BRIAN MCDONALD DIRECTOR EMERITUS, UNM BUREAU OF BUSINESS AND ECONOMIC RESEARCH
A guest column in the Oct. 23 Journal proposed exempting Social Security benefits from the state income tax as a way to assist New Mexico seniors who live in poverty. That proposal is misinformed and flawed.
Based on 2018 data, New Mexico now ranks 17th-highest – not third highest – in the nation for the percentage of seniors living in poverty. The percentage of poor seniors in New Mexico is now 10%, not much different from the national average of 9.7%.
Further, 16.6% of all New Mexicans live in poverty, 24% of all New Mexico children under age 18 live in poverty, and New Mexico leads the nation with 36.2% of children under age 5 living in poverty. New Mexico’s poverty problem is not principally within the senior demographic.
The loss of $73 million in state tax revenues from this proposal would reduce the amounts of money available for state spending, including educational, health care and child care programs benefiting poor New Mexicans. It would make New Mexico even more dependent upon oil and gas revenues. And the tax exemption for Social Security benefits would open the door to further erosion of the state income tax base, as there will certainly be efforts to exempt other retirement income, such as pensions for military, first responders, educators and other state and local government employees.
More to the point, most poor seniors do not pay state income tax now on Social Security, so they would receive no benefit from this proposal. In 2016, the IRS reported 242,340 tax returns from elderly taxpayers in New Mexico, while just 127,870 of them, 52.8%, reported taxable Social Security income on their federal income tax return – the basis for the New Mexico income tax. And of those 127,870, IRS data indicate that only 14,100 had adjusted gross income less than $25,000 and reported just 1.43% of all taxable Social Security income for all New Mexicans.
The federal and New Mexico tax codes already ensure that poor seniors will not pay income tax on Social Security benefits. Income including Social Security must exceed $32,000 for a married joint filer and $25,000 for a single filer before Social Security benefits are considered taxable income. If Social Security below these amounts is the only source of income for a senior, there is no need to even file a tax return.
New Mexico already has targeted tax policy to reduce or eliminate income taxes for low-income seniors. The New Mexico Low and Middle Income Tax Exemption allows up to an additional exemption of $2,500 for all low income taxpayers – a single filer making less than $36,667 and a married filer making less than $55,000. And New Mexico has an additional exemption of $8,000, targeted at low-income seniors with retirement income including Social Security: a single filer making less than $18,000, phased out at income of $28,500, and a married filer making less than $30,000, phased out at income of $51,000. Strengthening these two existing state income tax provisions would be a more efficient way to further benefit low-income seniors rather than eliminating a tax that very few of them pay.
A secondary argument for not taxing Social Security income was that an exemption will have economic development benefits by attracting retirees to the state. This assertion is unsupported by data and seems unlikely. Taxpayers with very high incomes and substantial Social Security benefits pay about two or three thousand dollars in state income tax on those benefits. Their decisions on retirement locations are more likely to be governed by considerations of weather and locations of children, grandchildren and friends than by modest possible tax savings. This proposal is principally an upper-middle/high-income tax cut masquerading as an anti-poverty measure. It would do little to help poor seniors but would reduce the progressivity of our income tax and impair state revenues, which will be essential when the current oil and gas boom recedes.
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