Tax cut on Social Security benefits doesn’t help those who most need it and is too expensive

February 22, 2023 6:00 am

Rich seniors would reap the most benefits; poorest would get none. Getty Images.

If you’ve heard anything at all about state tax policy this year, you have heard that Minnesota legislators are considering cutting state income taxes on Social Security benefits. At $1.26 billion and with 70% going to the top-earning 20% of seniors, exempting Social Security benefits from the state income tax is a bad idea that costs too much and benefits the wrong people, in more ways than one. 

Without restating many good columns, op-eds, and blog posts that have made the level-headed case for continuing Minnesota’s policy of sensible Social Security taxation, I want to quickly share some numbers that show how poor of an idea the Social Security tax cut really is. 

Too much to the top

The most common complaint about the Social Security tax cut is that it goes mostly to high-income retirees, and it does. The chart below shows the share of the tax cut and the number of tax cut recipients at various income levels, which highlights the outsized benefits to a relatively few top earners.

The Department of Revenue has not released estimates by income percentile — how much is going to the top 10%, the bottom 50%, etc. — but we know that the benefits accrue heavily towards the top. 

According to the Social Security Administration, just shy of 1.1 million Minnesotans received Social Security benefits in 2021. Meanwhile, the table below shows that 202,000 filers making over $100,000 per year — about the highest earning 20% of all seniors — would take home 69.3% of the total tax cut.

Although $100,000 might not sound like an enormous amount of money, it is important to consider the difference between a senior and a young worker or couple. Our socioeconomic system depends, more than ever, on younger people being able to save for the future. Seniors, in most cases, have already done things like purchase a home and put kids through college. For someone in this position, a passive income in the hundreds of thousands of dollars is a lot more than for someone just starting out.

Keep in mind that the figures here represent only those who would receive at least some benefit from ending taxation on Social Security. So, while 95,000 seniors would split 3.3% of the exemption, another 600,000+ Minnesotans will get nothing. Which brings us to the most compelling reason to scrap this proposal.

Too little to those in need.

The most frustrating part about the Social Security tax cut discussion is that it plays on the genuine needs of poor seniors, and then completely fails to provide them any meaningful assistance. Minnesota already exempts the majority of Social Security income from taxation, which means that the seniors who need help most will get none from this proposal. Based on SSA and DOR data, about 600,000 of Minnesota’s lowest-earning seniors will get nothing from this tax cut. And for those who would benefit, the actual dollar amounts are extremely modest. 

Putting aside 55% of all Social Security recipients who get nothing, the chart below shows weekly savings by income group. While seniors making well into six-figures save $40-$50 per week, those making $50,000 to $100,000 save less than half that much. And those who need it most get next to nothing: On average, a senior making less than $50,000 — the alleged target demographic of this plan to help those with the least — would save just $4.07 each week. 

For seniors in need, if they get anything at all, it’s not enough to make a difference. On the other side of the ledger: Cutting taxes for seniors will cost the state many opportunities to fund essential services for seniors, and to make investments in our collective future.

Too big a cost 

The surplus has made it easy to casually declare that there is enough money for everything. The truth is that running a society is expensive, and Minnesota has a lot of unmet needs. Furthermore, most of the surplus is one-time money that cannot be put toward the ongoing expenditures. The figure below shows the total ongoing surplus — $6.3 billion, as opposed to the larger number you hear that includes one-time money — against some major areas of Walz’s proposed budget. 

The Social Security tax cut costs about as much as maximizing federal funds for state child care assistance. It costs about half of Walz’s proposed K-12 increases, and roughly 150% of his new proposals for public safety and judiciary. And of course legislators have many more of their own priorities. As committee targets take shape, it is going to be harder and harder to make the math work.

Wrapping up

We’ve talked numbers, but there’s other arguments against this mostly age-based tax cut. For one, there is no reason to suspect low-income seniors are in any more need of some extra cash than low-income workers or families. If Minnesota is going to pass some form of relief, it should be based on need, not income type. 

It’s also important to consider the generational angle. At $1.26 billion, the Social Security tax cut proposed in the Senate is far larger than Walz’s proposals for higher ed funding, and considerably larger than his proposed support for a broken child care system.

Thankfully, the numbers are on the side of caution: Legislators have a lot of great ideas about how to help improve the quality of life for all Minnesotans. These ideas cost money, and as budget deadlines approach, the bottom line about the high cost of Social Security tax exemption is going to come through very clearly.

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Eric Harris Bernstein
Eric Harris Bernstein

Eric Bernstein is a policy analyst focused on state tax and budgetary policy. Since the summer of 2020, he has been policy director for We Make Minnesota — a coalition of labor and community groups organizing to raise state revenue for investment in health care, education, racial equity, sustainable environmental stewardship and other public priorities.