During his two terms as governor, the late William Donald Schaefer often observed that the hardest part of the job was saying no. Deserving people with good ideas and commendable goals came to his doorstep all the time. But the state can’t afford to reward all whether in the form of new spending or special tax breaks. At some point, fiscal prudence requires the state’s chief executive — or its legislature — to politely decline.
Such is the case with Gov. Larry Hogan’s plan to eliminate state and local income taxes on all retirement income of military veterans. The governor announced his proposal on veterans day. Although he declined to provide specifics, his justification was two-fold. He noted first that veterans deserved the benefit for serving the country (and there’s no argument there) and that this would make Maryland “more competitive” with states that offer similar benefits to those who have served, which somewhat overstates the situation. Most states with an income tax partially exempt military pensions (as Maryland currently does). One state that fully exempts military pensions is Pennsylvania, however.
So the question of whether to fully exempt military pensions comes down not to whether veterans are deserving but to cost versus benefit. The five-year cost of a full exemption is in the neighborhood of $100 million, according to most recent analysis by the Department of Legislative Services, even if phased in over three years, which is what Governor Hogan proposed to do the last time he offered legislation on the subject 10 months ago. That’s a hefty price tag, particularly given Maryland’s recent budgetary shortfalls. The payoff, Mr. Hogan insists, is that more military pensioners would choose to live in Maryland rather than retire in Pennsylvania or elsewhere.
Surely, there are some who would, but is there a big economic payoff there? Is this the best investment Maryland can make if the goal is to grow the economy or produce jobs? And perhaps more importantly, what about the state’s other retirees, those who are living on pensions and/or Social Security? Are there to be regarded as less deserving? What about police officers, firefighters, paramedics, correctional officers, teachers and others who have labored on the public’s behalf for relatively modest pay?
This picking or winners and losers among retirees is complicated by the fact that, on average, people who collect a military pension are better off financially than the average Maryland retiree. That’s why lawmakers have in the past chosen to offer a partial benefit. Under existing law (as of 2015), a retiree can exempt the first $10,000 of military retirement income from state and local taxes. That allows low-income retirees to get the most help. Disabled military pensioners get an even bigger boost. It’s also somewhat nonsensical to believe that retirees make decisions about where to live solely on state taxes when family and grandchildren, friends, cost-of-living and even weather can play just as large, if not a much, much larger role in that choice.
Of course, it’s no surprise that the governor is touting the tax break. He’s been advocating for one since he first ran for office, and he’s not the first. One of the loudest voices in support of a tax-free pension for military retirees was none other than Anthony G. Brown, the former lieutenant governor and colonel in the U.S. Army Reserve, who was Mr. Hogan’s Democratic opponent in 2014 and has since been elected to the U.S. House of Representatives. We opposed the proposal when Mr. Brown offered it in 2013, and we oppose it now as a special interest carve out that is not fiscally responsible.
Alas, fiscal prudence often takes a backseat in an election year. Whether the General Assembly approves the pension plan or not, Mr. Hogan scores political points. Kill it and the governor can point to the Democrats are unsympathetic to veterans in his campaign commercials. Approve it and, even if Maryland’s economy suffers when an overdue national recession drives down tax revenue in future years, no one will blame aid to military retirees which is, after all, a minor expense in the context of tens of billions of dollars in state spending.
But, of course, that’s exactly how government gets overextended. It’s mostly about good intentions, as Mr. Schaefer noted several decades ago. Maryland could easily be investing more in education, drug treatment, infrastructure or simply ensuring the state’s own struggling pension plan remains solvent. A beefed up military pension exemption won’t break the bank, but giveaways to every well-meaning, well-deserving group will. That’s the problem with holding elected office, you can’t please all the people all the time.
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