AZ Senate Panel Approves Tax Exemption for Military Pensions

Feb 27, 2019

By Howard Fischer - Capitol Media Services

PHOENIX -- Saying it's good for the economy long term, a Senate panel voted Tuesday to exempt retired veterans from having to pay state income taxes on their pensions.

But it faces an uncertain future amid opposition from some lawmakers of both parties who question why all veterans, including retired general officers with higher benefits, should get such a break. And then there's the question of the lost revenues to the state.

Current Arizona law provides an exemption of up to $3,500 a year on the amount of pension benefits that are exempt when taxpayers calculate what they owe in state income taxes. Assuming an average tax rate of 3 percent, that reduces their taxes by about $100 a year.

The proposal by Sen. David Gowan, R-Sierra Vista, would remove that cap entirely.

Sen. Sonny Borrelli, R-Lake Havasu City, who retired from the Marine Corps as a gunnery sergeant, said the average pension for an enlistee like himself after 20 years is about $20,000. Under SB 1157, that would translate out to about a $600 break in taxes.

But Borrelli said that among those in the officer corps, pensions tend to average out at twice as much. That got the attention of Sen. Lela Alston, D-Phoenix,

"I just do not feel that particularly that someone who's getting a $40,000-a-year pension needs this,'' she said. And Alston said that, once here, they then can go on to make $100,000 in a high-tech job in the private sector.

Yet at the same time, she said, Arizona is looking for money to improve teacher salaries, saying many start their career at $25,000 a year.

Gowan, however, said that's missing the point.

He said the legislation would help convince those retiring from the military to remain here, with other states offering more generous tax benefits.

"We want them to come here and spend their dollars in this state to help our families, help our friends,'' Gowan said.

Then there's the cost to the state of making military pensions tax exempt.

No one was able to provide an answer to that question during Tuesday's hearing, with Sen. Lisa Otondo, D-Yuma, saying she believes a similar proposal several years ago had a $49 million price tag.

The House is weighing a less far-reaching proposal to increase the exemption from $3,500 to $10,000. That has been estimated at reducing state revenues by about $15 million.

But several lawmakers said the more meaningful issue for them is how this could help the economy.

"We have lots of high-dollar jobs that remain unfilled,'' Darcy Mentone representing the Greater Vail Area Chamber of Commerce, told lawmakers. She said many of these likely could be filled by people retiring from the military -- assuming they can be convinced to remain in Arizona.

"They're often about 40 years old, they are in their prime workforce years, they're highly qualified, they're exceptional employees,'' Mentone said. "But they're leaving the state.''

The 7-2 vote by the Appropriations Committee sends the measure to the full Senate. But even if it's approved there it faces a rocky future.

Also Tuesday the House discussed HB 2011, the stripped-down proposal being sponsored by Rep. Gail Griffin, R-Hereford which would raise the exemption to $10,000. There, even some Republicans questioned whether those retiring at the top end of the pay scale should be given a tax break.

Rep. Walt Blackman, R-Snowflake, said he would prefer to focus the financial relief at those in the most need.

"The lower enlisted that retire out of the military are struggling financially,'' he said. "A lot of them want to come home to Arizona and cannot because they can't afford it.''

Rep. Travis Grantham, R-Gilbert, said he worries that Arizona may be creating a welfare state for some retired veterans.

"When you're about to retire from the military they take you in a room and they spend three days telling you how to file for unemployment or up your disability benefit,'' he said. "It's disgusting.''

And Grantham said he knows some veterans who retire at age 38 after putting in their 20 years.

"Yes, what they did was heroic, yes you should be rewarded for that service,'' he said. But Grantham said he can't support an across-the-board tax break for retired military.

Rep. John Allen, R-Scottsdale, expressed similar sentiments about carving out a tax break solely for retired military.

"I could find you five other groups of worthy people that we would love to have them live here,'' he said.

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