After at least eight attempts in the Legislature, California may finally join every other state in providing some tax breaks for military retirement income, which supporters say will help veterans stay in the state and contribute to a skilled workforce.
Assemblymember James Ramos has introduced, for the third time, legislation that would allow veterans to exempt up to $20,000 of their federal pensions if they earn less than $125,000 per year.
He narrowed his bill from last year, which attempted to exempt a veteran’s entire retirement income. Senator Kelly Seyarto, a Republican from Murrieta, introduced a similar bill in the Senate.
According to the most recent data from the United States Department of Defense, California has approximately 1.4 million veterans, 141,000 of whom receive military retirement income. An additional 26,000 Californians receive survivor benefits.
Ramos stated that the state would benefit from keeping veterans in California, where they could work in other industries after retiring from the military and contribute more to the tax base. California is home to the Navy’s Pacific Fleet as well as Camp Pendleton, which houses tens of thousands of Marines.
“They bring tested job expertise to our California workforce; they live in our communities and serve as volunteers and leaders,” Ramos, a San Bernardino Democrat, stated. “California can’t afford not to put out the welcome mat for our veterans.”
According to the legislators, both bills aim to keep more military retirees in California. According to data from the US Department of Defense, the state’s retired military population has decreased by about 28% as a result of out-of-state moves and deaths, falling from more than 195,000 in 2000 to just over 141,000 in 2022.
California’s rate of decline during that period was second only to the District of Columbia, where the veteran population fell by 35%.
There was no information available on the employment rate among military retirees (those who had served at least 20 years). However, according to Bureau of Labor Statistics data, approximately 96% of veterans aged 35 to 64 who remain in the labor force in California are employed.
‘The primary factor is cost of living’
Veterans leave the state for a variety of reasons, “but the primary factor is cost of living,” said David Boone, president of the San Diego Military Advisory Council, during 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 told me.
According to the Department of Finance, military retirees in California receive approximately $29,000 each year, for a total of about $4 billion per year by 2022. Surviving relatives of veterans receive a total of $400 million.
According to the Legislative Analyst’s Office, if the tax break is passed, California will lose an average of $600 in income tax revenue from each of the 130,000 eligible veterans. Gov. Gavin Newsom has proposed a similar idea in his budget proposal.
His office estimates that it will cost the state $130 million in the next fiscal year and $85 million each year thereafter.
However, the financial incentive may be insufficient to persuade retirees to remain in California, according to the Legislative Analyst’s Office, contributing little to the state’s goal of becoming a more competitive destination.
Sue Johnson, a former Californian, retired to Nevada after 27 years in the Air Force and Air National Guard.
“Even if it passes, I don’t think at this point that it’s enough,” she told me. “My husband and I had nothing and worked hard our entire lives, but our efforts were not recognized by state policies. It’s simply too much.
Teachers, firefighters, police might like a tax break
Staff on the Senate’s Revenue and Taxation Committee expressed concern that Seyarto’s bill could set a precedent for other professions.
“If the Legislature exempts retirement income for one line of work that directly benefits the public, why not extend the same treatment to other commendable professions like teachers, firefighters, and police officers? This could lead to a slippery slope in which retirement income from other professions is excluded from gross income, reducing the income tax base,” the committee’s consultants wrote.
Military retirees and surviving relatives in California pay state and federal income taxes, but are exempt from military death benefits paid to qualified survivors, pay for time served in combat zones, and partial property tax exemptions.
Of the 41 states with a state income tax, 25 exempt all military retirement income, while the remaining states exempt it partially.
According to the state analyst, California may see a non-monetary value in the proposal: 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 has the potential to improve veterans’ perceptions of California.
