By the barest margin, a Senate panel voted Wednesday to give an additional break in state taxes to military retirees despite the potential loss of $15 million in revenues.
SB 1167, approved on a 4-3 bipartisan vote by the Finance Committee, would allow those who have served for at least 20 years to exempt $10,000 of their pensions from the state income tax. That quadruples the current $2,500 exemption.
About 55,000 of the state’s estimated 550,000 veterans would qualify.
Sen. Gail Griffin, R-Hereford, told colleagues they should not look at her proposal as a tax break but as a “workforce development bill.”
“Military retirees bring with them diverse skills, education and experience that Arizona desperately needs,” she said.
More to the point, Griffin said people can retire as young as 38, meaning they are ready for a second career. And she said that any income they get from their civilian jobs would be fully taxable, as would what their spouses earn.
Not everyone views the issue that way. Sen. Steve Farley, D-Tucson, worried that the state would end up with lower tax collections, money he said is needed for education and other state services.
Sen. Warren Petersen, R-Gilbert, sees the legislation through a different lens. His goal is to eliminate the state income tax entirely, or at least drive the rate as low as possible.
“But in order to do that, I think what we need to do is we’ve got to stop with all of the exemptions and the credits,” he said.
Griffin, however, insisted that there would be no net loss of tax dollars.
She cited a 2016 study done in South Carolina which last year agreed to exempt all military pension dollars from state income taxes. That study, Griffin said, concluded the economic activity from bringing more military retirees to the state “will completely offset the annual loss to state tax revenue from the tax exemption itself.”
Griffin said about one out of every four Arizonans who get military pensions was an officer. And the estimate is that a typical pension for an E-6 — the rank of an enlisted staff sergeant in the Army — is about $23,000 a year.
Raising the exemption by $7,500 does not translate into an identical reduction in taxes. Instead, it reduces the retiree’s taxable income, the amount against which the state’s taxes are computed.
Arizona’s individual income tax rates vary from 2.59 to 4.54 percent. Assuming an average tax rate of 3.5 percent, that would provide an estimated tax break of $262 a year.
While the proposal was endorsed by Gov. Doug Ducey in his State of the State speech it faces an uncertain future in the full Senate.