California stands alone as the only state still taxing veterans’ retirement income, but two new bills could finally change that status, offering hope to military retirees considering the Golden State for their post-service life.
At a Glance
- California is currently the only state that fully taxes veterans’ retirement income
- Senate Bill 1 and Assembly Bill 53 would exempt up to $20,000 in military retirement income for veterans earning under $125,000 annually
- Since 2016, California has lost approximately 2,600 military retirees annually, resulting in over $558 million leaving the state
- The tax exemption would cost about $600 per taxpayer in lost revenue, according to state analysis
- All other states either have no income tax or offer partial to full exemptions for military retirement pay
California’s Unique Tax Burden on Veterans
California currently stands alone in its approach to taxing military retirement income. While almost every other state either has no income tax or offers some form of tax break for veterans’ retirement benefits, California continues to apply its full tax rates to military pensions. This policy places California at a competitive disadvantage when veterans choose where to settle after completing their service.
The high cost of living in California already presents challenges for retirees on fixed incomes, and the additional tax burden has contributed to a steady exodus of military retirees from the state over recent years.
By comparison, states like Florida, Texas, and Washington have no state income tax at all, making them attractive destinations for military retirees. Even states with income taxes often provide significant exemptions – Kentucky offers tax-free status for up to $31,110 of retired military pay, while Louisiana allows up to $50,000 tax-free.
These tax advantages, combined with lower overall costs of living, have resulted in California consistently losing veteran residents to other states despite its large military presence and temperate climate.
Proposed Tax Relief Measures
The proposed legislation, Senate Bill 1 and Assembly Bill 53, represents a bipartisan effort to address this competitive disadvantage. These companion bills would create partial tax exemptions for veterans’ retirement income, allowing up to $20,000 in military pension benefits to remain tax-free for veterans earning less than $125,000 annually. While not offering complete tax exemption like many other states, this measure would significantly reduce the tax burden on many military retirees in California and potentially stem the outflow of veterans to other states.
“This bill is necessary to make California more veteran friendly, and make it a more desirable place to call home upon retirement,” Ramos said in a press release last month.
The bills have gained substantial support from military and veteran organizations across California, including the San Diego Military Advisory Council. Advocates point out that veterans bring valuable skills, leadership experience, and community involvement to areas where they settle. Additionally, military retirees often begin second careers, contributing to workforce development while still receiving their military pensions, which could generate economic activity that offsets the tax revenue loss.
Economic Impact Considerations
The economic impact of these bills continues to be debated in Sacramento. According to state analysis, the average tax revenue loss from excluding $20,000 from taxable income would be approximately $600 per qualifying taxpayer. This has raised concerns about potential budget shortfalls at a time when California already faces fiscal challenges. Data shows California has been losing an average of 2,600 military retirees annually since 2016, resulting in over $558 million leaving the state economy – a figure that proponents argue would be partially recaptured by making California more competitive.
“The ‘primary factor’ for veterans choosing to retire in other states is the cost of living,” said David Boone, President of San Diego Military Advisory Council, during a March 12 state Senate tax committee hearing.
The Senate Committee on Revenue and Taxation has acknowledged that implementing these exemptions would require either reduced spending or increased taxes elsewhere to compensate for the revenue loss. However, supporters contend that the potential for increased veteran retention and attraction to California could generate economic benefits through spending, property taxes, and second-career income taxes that might offset much of the direct tax revenue reduction. The full fiscal impact would likely depend on how many veterans decide to remain in or relocate to California as a result of these changes.
