The Impact of State Income Tax Breaks for the Elderly on Savings and Income Security

This first study provides the causal effects of the state retirement income exemption policies on
saving for retirement and long-term impact on income in retirement, which have been understudied. Using the Social Security W2 earnings records linked to restricted Health and Retirement Data (HRS) data, I find that a 26% decline in savings into retirement plan accounts in
post-policy periods. Workers in states with exemption offers were also less likely to save
compared to those worked in states without exemption. The fall in household income (both
before and after-tax) in retirement further implies that seniors in exemption states were not better
off than their counter-part states. Hence, states might consider rethinking the effectiveness of
these policies.