The Price of Paradise

Many baby boomers approaching the age of 65 don't have the savings to retire. The reasons are legion: spending beyond their means, too much debt, marriage dissolution and other family issues, unemployability following a layoff, poor health, living in a high-cost region, etc. For those at the margin of self-sufficiency, one possibility has been the option of moving to a lower-cost-of-living, lower-tax state. Now that escape hatch may be closing:

Some states are starting to have second thoughts about the tax breaks they give older people.

For decades, state governments have been generous with those breaks, perhaps because older Americans tend to show up at the polls to vote. But mired in budget deficits, some states are starting to limit or even rescind tax exemptions for these residents—and experts say others may follow. [snip]

For retirees contemplating relocating to a state with a lower tax burden, the trend highlights an emerging risk: The retiree tax exemptions on the books today may be gone tomorrow.

States where taxes have recently gone up are in red, down are in green (WSJ graphic)

The National Conference of State Legislators has published an interactive table that shows how specific taxes have changed on a state-by-state basis. My home state of Hawaii, where we're thinking of retiring, has recently raised the following taxes according to the table.

In our particular case, state taxes won't be the key factor in determining where we eventually rest our weary heads. However, at the margin surely some wealthy retirees will decide that the price of paradise is too high.

The bigger problem is that younger, high-income producers who currently pay into the system much more than they take out will move away or stay away. Hawaii, which is the most expensive state in which to live but is ninth in median income (according to the U.S. Census Bureau) can ill afford to widen the disparity, but that appears to be the direction that it's headed.  © 2013 Stephen Yuen