Haley, military supporters seek end to military retiree tax

Haley AP

Military boosters are trying to get South Carolina lawmakers to sharply reduce – and ultimately end – the state’s income tax on military retirement benefits.

For the first time, Gov. Nikki Haley inserted a one-year, $9.8 million tax cut in her 2016-2017 budget proposal. It’s the first cut in a proposed three-year-phase-in that would ultimately cost the state $33 million annually.

Although few want to criticize the idea in this military-friendly state, some wonder whether the state can afford such a hole in its spending plans.

The governor argues that many who have put in 20 years in uniform are still in their mid-40s or 50s and ready to start second careers.

“To get them to retire in South Carolina is a win for us,” said Haley, who often refers to herself as a military spouse. Her husband Michael serves in the South Carolina Army National Guard.

The retirees’ second incomes would be taxed normally, contributing to the state’s economy, Haley argues.

But a state tax expert with the nonprofit group Tax Analysts in Falls Church, Va., questions the proposal.

“It’s great politics, but it’s bad tax policy,” said David Brunori.

He said several states have cut military retirement taxes as a means to attract veterans, but he argues the proposal has more to do with garnering votes.

“It’s politically attractive to cut the tax burden of one segment of society that is a reliable voting bloc,” Brunori said. “But it means everyone else will have to pay more.”

The proposal passed the South Carolina House unanimously last year, but was stopped cold in the Senate, never leaving a subcommittee.

The issue comes as lawmakers continue their yearslong debate over fixing crumbling roads. The Senate is mulling a $400 million package that would get the pavement on almost all South Carolina interstates to good condition. It would fix less than half of the state’s primary roads and half of its deficient bridges.

William Bethea, head of the governor’s Military Base Task Force, said he hopes again this session to convince senators that the benefits of attracting military retirees will ultimately outpace the initial costs. The state will derive income from the retiree’s second jobs, their purchases of homes and cars, and potential income from retirees’ spouses and other family members, he said.

“I really think that it would take about 10 years, but over time, the positive impact will win out,” Bethea said.

A full state income exemption for military retirement is offered by 18 other states, according to the National Conference of State Legislatures. Partial exemptions are available in 16 states. That includes South Carolina, which currently exempts $3,000 in income for military retirees. It increases to $10,000 if a retiree is 65 or older.

Among other states offering partial tax exemptions are neighboring Georgia and North Carolina. Nearby Tennessee doesn’t have a state tax income at all, along with eight other states, according to the conference’s report. Seven states offer no exemption for military retirees.

Columbia businessman Bill Dukes, a senior adviser to acting Army Secretary Patrick Murphy, contends South Carolina needs to catch up.

“We’re not competitive. From a retired military person’s point of view, they know every state and what they offer and South Carolina doesn’t have it,” said Dukes.