Americans are moving from high-tax states to low-tax states. The smart states know this and are cutting income tax rates, as discussed in the forthcoming Fiscal Policy Report Card on America’s Governors.

One group that states want to attract with tax cuts are seniors and retirees. Just this year, 10 states cut their taxes on retirement income, which means income from Social Security, defined-benefit (DB) plans, and defined contribution (DC) plans, such as 401(k)s. Currently, about three-quarters of the states fully exempt Social Security benefits from taxes. About a dozen states fully exempt DB and DC benefits from taxes, and about half the states partly exempt it.

Why the focus on tax cuts for seniors? One reason is that seniors vote at substantially higher rates than other Americans. Another reason may be that policymakers think seniors impose lower costs because they don’t use state-local services such as K‑12 schools. A further reason may be that policymakers view migrating seniors as particularly responsive to taxes.

Seniors are moving from high-tax to low-tax states, as shown in the chart. On the horizontal axis is the sum of state and local sales, property, and individual income taxes as a percentage of income in 2019. On the vertical axis is the ratio of in-migration to out-migration for households age 65 and older, based on IRS data for 2020. The ratio is above one for states enjoying net in-migration and below one for states suffering net out-migration. Each state is a dot.

Seniors are moving from the high-tax/out-migration states on the bottom right to the low-tax/in-migration states on the top left. The orange line is Excel’s fitted regression line, which is highly statistically significant (F‑stat=12.3, t‑stat=-3.5). There are a few exceptions to the general pattern including Alaska, Maine, and Vermont.

Another angle on seniors and state taxes comes from Kiplinger, which provides a State-by-State Guide to Taxes on Retirees. Kiplinger examines income taxes, sales taxes, property taxes, and taxes on retirement income, and categorizes the states and D.C. as either “most tax-friendly,” “tax-friendly,” “mixed,” “not tax-friendly,” and “least tax-friendly.” It turns out that the degree of tax friendliness is correlated with the senior migration ratios discussed above. The average migration ratio for the “most tax-friendly” states is 1.28, whereas the average ratio for the “least tax-friendly” states is 0.86.

I would rather that states cut overall tax rates than just cutting taxes for favored groups. But for seniors, policymakers across the political spectrum see the need for their states to stay competitive. In Maryland, Governor Larry Hogan said, “Our state’s sky-high retirement taxes remain the one area where we are still not effectively competing with other states.” In Connecticut, Governor Ned Lamont said, “We’re also going to eliminate the income tax on pension and 401(k) income for most households. Stay in Connecticut and watch your grandkids grow up in your living room rather than waving to them from a Zoom room in Delray, Florida.” Both governors followed through this year and cut taxes on retirees.