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Increased Tax-Free Benefits for Military Retired: Too Little, Too Late?

From: Kathleen Rutherford, Executive Director, A Better Delaware

On July 21, 2022, Governor Carney signed SB 188-1 into law before a roomful of National Guard who will not benefit from it.

Amending Delaware Code, Title 30 will exclude an additional $10.5K of military pensions from taxable income. Lawmakers in Dover say it’s “an incentive for military retirees under age 60 to locate in Delaware,” ignoring three dozen other states where military pensions are 100% tax-free.

Many others, like Virginia, are working to phase in tax exemptions in progressive $10K increments to a maximum of $40K in 2025.

In 2004, when advocates first began beating the 100%-military-pension-exemption-drum, about 20 States were income tax-free. SB 95 was born in 2005, SB 48 followed two years later. Both ended up in desk drawers.

Senator Mantzavinos introduced SB 188 (originally 100% tax-free) in January 2022 when there were 26 tax-free states. While Delaware struggled to whittle SB 188 down to an amended $10.5K benefit immediately upon retirement, two more States came on line. On the day SB 188-1 became law, Delaware trailed 75% of America.

Furthermore, the bill excludes National Guard even though the Reserve Component (RC) was in previous versions. One “grey zone retiree” –an RC member with “20 good years,” vested for retirement but not yet 60, the age at which they draw their pension–told me he will leave Delaware so he can keep all his military pension.

Delaware’s new law is unlikely to entice anyone unless they were already coming for other reasons. Our Governor points to our excellent retiree tax benefits. Kiplinger Newsletter agrees: Delaware is the most tax-friendly place to retire.

And that is precisely the problem! With so many retirees flocking to Delaware, who will provide goods and services to this aging population? Veterans and Military Retirees (MR) provide a solution since they tend to be community-minded, physically fit, and with solid work ethics in skill sets employers seek.

Delaware ranks 15% in the nation based on the percentage of veterans (in 2019, 66,896 of them –8.8%– were veterans.) But working-age veterans only make up 18% of that total (12,053 are Gulf War II era vets). The same is true for our 9,000 MR; less than 2,000 are of “working age.”

Veteran v. Retiree. According to USC Title 38, a veteran is anyone who served on active duty for as little as 180 days and was not dishonorably discharged. The majority of veterans (81%) never reach retirement, either by their own choice or the military’s up or out system. While 85% of veterans receive Honorable discharges, a veteran may be homeless or have been terminated for medical problems or needs of the service. On the other hand, MR stood the test of time, proven worthy in the knowledge of the job, of dedication to duty, and leadership.

Civilian v Military Retirees:  Whereas retired civilians cease working, the MR is just beginning a new career. The average MR is a 38-year-old sergeant with a working spouse and college-aged kids. Officers might be 52 because they entered after college. Enlisted or officers, most MR are college educated. Eighty percent of the force are enlisted, so 80% of retirees are enlisted. The average enlisted military pension is < $35K per year, <$46K for officers.

Unlike civilians, MR earns more in their second careers than the amount of their military pension. Hence, a tax-free MR pension is a “loss leader” to attract highly skilled talent to Delaware, whose civilian income (and that of their spouse) remains 100% taxable.

Military skills are needed. Most MR excel in highly technical jobs that are in demand. Any job you can think of, there is a military MOS equivalent. But we cannot attract these skills because Delaware ranks middling to worst as a place for RM.

Kiplinger Newsletter ranks Delaware as worst in “The Ten Least Tax-Friendly States for Military Retirees”.  According to Kiplinger, our $12,500 tax-free pensions “is smaller than similar exemptions available in other states that do not fully exclude military pension.”  Our new bill does not change this fact. It only makes it available sooner.

Delaware fares better in WalletHub, ranking 26th because WalletHub included non-financial comparisons, one of which is Delaware’s low homeless vet population. This factor may apply to veterans but rarely to MR.

Too little, too late. Delaware needs 100% tax relief on military pensions now, not just an additional $10.5 tax-free advantage for those under 60.