While a proposal to exempt all pension and annuity earnings from state taxation has bogged down, the General Assembly’s tax-writing committee has crafted a compromise that would exempt more middle-income retirees from paying taxes on these earnings.
The proposal, which the Finance, Revenue and Bonding Committee is expected to vote on before its deadline Thursday, drew mixed reviews during a public hearing Friday.
While the Connecticut AARP and other retiree advocates testified the bill helps make the state more affordable, lawmakers still need to work toward a broader exemption, they said.
“The reality for many retirees is that a fixed income is no longer a fixed income — it is a shrinking income to pay for essentials like prescription medications, food and utility bills,” said John Erlingheuser, senior director of advocacy for the Connecticut AARP, who added that the cost of prescription drug treatments for diabetes, asthma and cancer have grown by thousands of dollars since 2015.
Connecticut currently exempts from the state income tax all pension and annuity earnings — but only for individuals whose overall income from all sources is less than $75,000 per year. Similarly, married couples’ retirement earnings are totally exempt if the household’s overall income is less than $100,000.
Sen. Cathy Osten, D-Sprague, spearheaded a measure to exempt all pension and annuity earnings regardless of household income. Osten and others argued it would bolster the state’s economy by prompting more workers to retire in Connecticut. She and others also argued the “cliff” effect — eliminating the exemption entirely if household income exceeded the limit by even $1 — was unfair.
The compromise measure phases out the exemption — but across a relatively modest range of incomes.
For example, a single filer with total income below $75,000 still would receive a full exemption. Those whose income exceeds $75,000 would receive a partial exemption, which would shrink gradually as income increases, and vanish entirely for filers topping $100,000.
Similarly, couples would continue to get the full exemption if their total income is below $100,000 but also would get a partial tax break if their income falls between $100,000 and $150,000.
The compromise measure would make a difference, because every dollar paid out in pension benefits generally translates into $1.25 pumped into Connecticut’s economy, according to Michael Barry, coordinator for the Connecticut Coalition for Retirement Security and a retired state probation officer.
