Economic Impact of Military Retirees in Idaho 2019

Report Authors

• Matthew May, PhD, Senior Research Associate
• Gabe Osterhout, Research Associate

This report was prepared by Idaho Policy Institute at Boise State University
and commissioned by the Idaho Defense Alliance.

Recommended citation: May, M., & Osterhout, G. (2019). Economic Impact of Military Retirees in Idaho. Idaho Policy Institute, Boise State University.

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Executive Summary

Idaho Policy Institute was contracted to complete a profile of Idaho’s military retiree population, calculate its impact on the state’s economy and estimate the cost of fully exempting military pensions from state income tax. The military retiree population has grown 16% in the last decade – 10th highest in the nation. As of 2018, there are 14,661 military retirees in Idaho, which constitute approximately 11 percent of the state’s veteran population. Additionally, there are 1,948 survivors. They receive a combined $376 million in pension income annually.

Our analysis suggests that Idaho’s military retiree and survivor populations contribute approximately $90.6 million in state and local tax revenue impacts. Additionally, exempting all military pensions from state income tax would necessitate Idaho’s military retiree population increasing by 5-25 percent in order to offset costs to the state.

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Military retirees are an increasingly attractive demographic to many states. Generally more educated and affluent than their non-military counterparts, they are believed to produce a substantial impact on a state’s economy, as many choose to begin a second career post-retirement. Idaho Policy Institute (IPI) was contracted by the Idaho Defense Alliance to complete a profile of Idaho’s military retiree population, calculate its impact on the state’s economy and estimate the impact of fully exempting military pensions from state income tax.¹

It is important to note the distinction between veterans and military retirees. Federal law defines a veteran as “a person who served in the active military, naval, or air service and who was discharged or released under conditions other than dishonorable.” Military retirees, conversely, are generally those who served 20 years or more on active duty in the U.S. military. In short, all military retirees are veterans, but not all veterans are military retirees.

In order to attract military retirees, several states have fully exempted military pensions from state income tax. Under Idaho Code 63-3022A, military retirees over the age of 65 are eligible to deduct retirement benefits from their state income taxes, up to a certain threshold. That threshold can change from year to year. Those under the age of 65 receive no deduction.

This report is organized into three main sections. The first section provides an overview of the military retiree population in Idaho and its demographic characteristics. The second section reports the results of economic modeling and analyzes the number of military retirees necessary to offset the cost of a full exemption of military pensions from state income taxation. Finally, the third section provides a comparative profile of Idaho against other states.

^{1 The authors of this study wish to acknowledge the Kem C. Gardner Policy Institute at the University of Utah for their openness in sharing and discussing their methodology for a similar profile completed for the state of Utah. Their assistance was invaluable.}

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Population and Trends

Military Retirees by County

As of September 30th, 2018, the U.S. Department of Defense (DoD) reports 14,661 military retirees and 1,948 survivors in Idaho. Not surprisingly, the largest concentrations of retirees and survivors are found in the three most populous counties in the state—Ada (5,351), Kootenai (1,788) and Canyon (1,780). A close fourth, with 1,719 retirees and survivors, is Elmore County, home to Mountain Home Air Force Base. Table 1 summarizes military retirees and survivors in Idaho by county.

^{* Due to privacy concerns, we have counted survivors as retirees in counties that have five or fewer survivors. We have not adjusted total statewide counts.}

^{Source: U.S. Department of Defense, Office of the Actuary, data request}

Veterans, Military Retirees and Reserve Retirees in Idaho

It is important to note the distinction between veterans and military retirees. While a veteran is anyone who served in the military that was not dishonorably discharged, a military retiree is generally someone who served 20 years or more, either on active duty with one of the branches of the U.S. military or accrued enough qualifying years with the National Guard or Reserves.

Military retirees comprise approximately 11 percent of Idaho’s total veteran population.² Of that 11 percent, approximately 79 percent would be classified as active duty retirees while 21 percent would be classified as reserve or National Guard retirees. Figure 1 summarizes this breakdown.

^{Data Source: U.S. Department of Veterans Affairs; U.S. Department of Defense, Office of the Actuary; IPI analysis}

Growth Rates of U.S. and Idaho Retiree Populations

From 2003 to 2017, Idaho’s military retiree population has grown at an average rate of 1.9 percent each year. The largest growth rate occurred in 2007, at 3.3 percent, while the lowest rate was in 2012, at 1 percent. This was slightly higher than the U.S.’ overall average growth rate during the same period (0.9 percent). Figure 2 shows both growth rates over time.

^{Data Source: U.S. Department of Defense, Office of the Actuary Statistical Reports, FY 2002-2017; U.S. Cen­sus Bureau Population Estimates}

Military Retirees as a Percentage of the Adult Population in Idaho and the U.S.

Military retirees constitute a slightly higher percentage of the adult population in Idaho (an average 1.1 percent) than the U.S. at large (an average 0.9 percent). Even so, trends for both have been relatively flat, as depicted in Figure 3, suggesting relative stability in the overall population.

^{Data Source: U.S. Department of Defense, Office of the Actuary Statistical Reports, FY 2002-2017; U.S. Cen­sus Bureau Population Estimates}

Idaho’s Share of U.S. Military Retirees by Age

From 2002 to 2017, Idaho has been steadily increasing its proportionate share of all U.S. military retirees. In 2002, Idaho accounted for 0.58 percent of all U.S. military retirees. By 2017, this share had grown to 0.67 percent. Figure 4 depicts this growth, as well as retiree age.

When we look at age data, we can begin to see a trend. Generally speaking, military retirees under the age of 65 produce a greater economic impact to the state by reentering the workforce and spurring further economic activity (and therefore benefits) to the state. Those over the age of 65 are far more likely to truly retire and rely on their pension for income. Furthermore, those pensions are already partially exempt from state income tax under Idaho Code.

In 2002, 43 percent of Idaho’s military retirees were over the age of 65 while 57 percent were under that threshold. By 2017, those numbers had nearly reversed, with 53 percent of military retirees in Idaho over 65 and only 47 percent under 65. This trend can be partly explained due to the natural aging of the population over time, but the relative flatness of the under age 65 trend nevertheless suggests that Idaho has had difficulty attracting younger military retirees to the state over the past decade.

^{Data Source: U.S. Department of Defense, Office of the Actuary Statistical Reports, FY 2002-2017; U.S. Cen­sus Bureau Population Estimates}

Age at Retirement

Figure 5 breaks down all U.S. military retirees by their age at the time of their retirement as of FY 2017 (the most recent full statistical report available). One in three military retirees choose to retire between the ages of 40 and 44, while 22 percent choose to do so between the ages of 35 and 39. Approximately 20 percent retire between the ages of 60 and 64, while very few—0.04 percent—wait until they are 65 or older to retire.

^{Data Source: U.S. Department of Defense, Office of the Actuary Statistical Report on the Military Retirement System, FY 2017}

Demographic Characteristics of Military Retirees in Idaho

Using Public Use Microdata Sample (PUMS) data from the U.S. Census Bureau’s American Community Survey (ACS) for 2012-2016,³ we are able to estimate demographic characteristics of Idaho’s military population. The first step in this process is to identify which ACS respondents are likely military retirees. Using age (38 years or older to account for the necessary 20 years of military service), retired pay and approximate years of service (derived from a series of yes/no questions on if the respondent served during a series of mutually exclusive time periods) we are able to identify likely military retirees—as well as active duty or reserve status—in the ACS sample.

Using data from the DoD’s Office of the Actuary for the same time period (2012-2016), we calculated Idaho’s average active duty retiree to reserve/National Guard retiree ratio (79.4 percent to 20.6 percent, respectively). We then used that ratio to weigh the Census data to more accurately reflect Idaho’s military retiree population and approximate this split.

Demographics of Census Sample

^{Source: U.S. Census Bureau, American Community Survey (2012-2016); IPI analysis}

Table 2 summarizes the Census-derived demographic characteristics of Idaho’s military retiree population. The 671 likely military retirees identified in the sample represent approximately 13,604 of Idaho’s total military retiree population. The median age of military retirees is 67 years and they are 95 percent male. Approximately 25 percent of military retirees were born in Idaho, compared to 32 percent of non-military retirees and 39 percent of the adult population. A higher proportion of military retirees are married—78 percent compared to 61 percent of non-military retirees and 58 percent of the adult population. Also, a higher proportion of military retirees have at least one child under 18 years of age in their household (14 percent compared to eight percent of non-military retirees).

Age of Retirees

Figure 6 breaks down the ages of military retirees, non-military retirees and the adult population of Idaho. As earlier data suggested, more than half of Idaho’s military retirees are over the age of 65. Approximately 44 percent fall between the ages of 35 and 64. The split is even more pronounced among non-military retirees, with 69 percent over age 65, 29 percent between 35 and 64 and only 2 percent under age 34.

Financial Characteristics of Census

As seen in Table 3, as a group military retirees in Idaho are generally more educated than non-military retirees or the adult population. Approximately 81% went on to receive an education post-high school compared to 61 percent of the adult population and 66 percent of non-military retirees. Roughly 19 percent of military retirees earned a graduate or professional degree, compared to 13 percent of non-military retirees and only seven percent of the state’s adult population.

^{Note: Dollar amounts have been adjusted for inflation to 2018 dollars.}

^{Source: U.S. Census Bureau, American Community Survey (2012-2016); IPI analysis}

Approximately 29 percent of military retirees are employed, compared to 16 percent of non-military retirees. While a slightly higher percentage of non-military retirees own a home (87 percent to military retirees’ 85 percent), the median home value for military retirees is slightly higher. When we look at median household income, however, military retirees perform substantially better: $71,911 annually compared to non-military retirees’ $53,229. We see a similar gap when looking at income on a per adult basis. Figure 7 breaks down median income per adult by retirement and non-retirement income sources.

^{Note: Dollar amounts have been adjusted for inflation to 2018 dollars.}

^{Source: U.S. Census Bureau, American Community Survey (2012-2016); IPI analysis}

^{2 To preserve comparability with the most recent retiree count, the U.S. Department of Veterans Affairs’ FY 2016 reported count of 123,140 veterans in Idaho was inflated to 129,686 to match the 5.3 percent growth of Idaho’s military retiree population over the same time period.}

^{3 The 2012-2016 data was the most recent available at the time of this report.}

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In order to assess the fiscal impact of a military pension income tax exemption, it is important to examine the economic impact of those pension dollars throughout the state. In this section, we begin by looking at military retiree pension income, then estimate non-pension income, as well as anticipated tax revenue to the state and government expenditures relative to retirees. We then estimate the induced economic effect on Idaho from military retiree pensions to determine their overall net fiscal impact. Finally, we conclude by estimating how many additional retirees would need to come to Idaho in order for an income tax exemption to be revenue neutral or have a neutral net fiscal impact.

Tax Revenue and Net Fiscal Impact

Military and Retiree Pensions/Non-Pension Income

The annual Statistical Report on the Military Retirement System discloses all DoD pension payments at the zip code level. Using this data, we were able to estimate pension payments up to the county level in Idaho. We then used county-level ACS data on retirement income, household income and the adult population to estimate military retirees’ non-pension income. We summarize these results in Table 4.

^{Note: Dollar amounts have been adjusted for inflation to 2018 dollars.}

^{Source: U.S. Department of Defense, Office of the Actuary, data request; U.S. Census Bureau, American Community Survey, 2013-2017 (5-year estimates); IPI analysis}

Estimated Taxes Paid by Idaho Retirees and Survivors

Using Idaho military retirees’ pension and non-pension income, we are able to estimate how much in state and local taxes they contribute. To do so, we use the effective tax rates for the three most common forms of taxation in Idaho: state income tax (2.27 percent), state sales tax (2.34 percent) and local property tax (2.37 percent). Additionally, we reduce the taxable pension dollars for state income tax by 53 percent in order to account for military retirees over the age of 65, who are already able to deduct a sizable portion of their pensions from their state income tax. This ensures that our estimates of tax revenue and projections as to the eventual cost of a full income tax exemption for military pensions more accurately reflect the reality in Idaho. Military retirees’ non-pension income remains fully taxed. Table 5 summarizes these results.

^{Source: U.S. Department of Defense, Office of the Actuary, data request; U.S. Census Bureau, American Community Survey, 2013-2017 (5-year estimates); Idaho State Tax Commission, 2018; IPI analysis}

Military retiree pensions are directly responsible for an estimated $4 million in state income tax, while their associated non-pension incomes produce $16.7 million in state income tax revenue, for a combined total of $20.8 million. Military retirees are also responsible for approximately $26 million in state sales tax revenue and $26.4 million in local property taxes. In all, military retirees pay $73.2 million a year in state and local taxes, or approximately $4,406 a year per military retiree/survivor.

Direct Net Fiscal Impact of Military Retirees

Government generally spends money in ways that benefit citizens, providing roads, police and fire protection, education and other government services. As populations increase, the amount of service necessary also increases. As such, it is fair to assume that as the military retiree population in Idaho increases, the amount of money the government must spend to maintain these services also increases. Using the U.S. Census’ 2016 State & Local Government Finance Historical Dataset, we estimated the per-person amount of government expenditures for all Idahoans (adjusted for inflation). We then used these costs to estimate government expenditures that are directly associated with the population of military retirees in Idaho—for example, we excluded higher education costs since the population served by that expenditure (18 years or older) are generally considered independent adults. Similarly, our earlier Census-derived demographic profile indicates that only 14 percent of military retiree households in Idaho include school-age children (ages 5 to 17). As such, only 14 percent of military retirees are assumed to benefit from K-12 government expenditures.⁴ Table 6 summarizes the net fiscal impact of military retirees in Idaho.

In 2018, military retirees paid an estimated $46.8 million in state taxes while receiving $26.5 million in state services, producing a net effect of $20.3 million in the state government’s favor. Conversely, retirees paid an estimated $26.4 million in local taxes while receiving $27.2 million in services, producing a net deficit of $794,938. Taking both levels of government together, military retirees paid $73.2 million in taxes and received $53.7 million in services, leaving their overall net effect towards the state positive at $19.5 million or $1,176 per retiree or survivor. We were not able to complete a similar analysis for non-military retirees at this time, so we do not have a comparative net impact.

^{Source: U.S. Department of Defense, Office of the Actuary, data request; U.S. Census Bureau, American Community Survey, 2013-2017 (5-year estimates); U.S. Census, 2016 State & Local Government Finance Historical Dataset; Idaho State Tax Commission, 2018; IPI analysis}

Economic Impact Analysis

Economic Impact

Beyond direct taxation of retirement income, military pensions also spur economic activity that can benefit a state. Using the IMPLAN platform, we were able to estimate the induced economic activity associated with military retiree pensions in Idaho.⁵ The IMPLAN model estimates that military retiree and survivor pension payments alone help create 2,762 jobs in Idaho’s economy. Additionally, these pension payments are responsible for $193.4 million in economic activity throughout the state. In terms of income, the induced economic activity creates approximately $110.4 million in labor income in addition to the $375.7 million in direct pension payments from the DoD, for an overall income impact of $486.1 million in the state. These results are summarized in Table 7.

^{Source: IMPLAN economic model analysis; U.S. Department of Defense, Office of the Actuary, data request}

Induced Tax Revenues from Military Retiree and Survivor Pensions in Idaho

The IMPLAN analysis indicates that activity induced by the spending of military pension payments in Idaho is responsible for approximately $2.5 million in additional state income tax revenue, $8.6 million in state sales tax revenue and $6.3 million in local property taxes. When combined with the estimated tax revenues from pension payments in Table 5, we are able to estimate the total impact of military pensions on Idaho’s tax revenue. These results are summarized in Table 8.

^{Source: IMPLAN economic model analysis; U.S. Department of Defense, Office of the Actuary, data request}

In total, military pension payments are responsible for approximately $6.5 million in state income tax revenue, $17.4 million in state sales tax revenue and $15.2 million in local property tax revenue. This constitutes a combined $39.1 million positive impact to state and local tax revenues—or an additional $2,356 to the state per military retiree or survivor.

Direct and Indirect Net Fiscal Impact

With this information, we are able to update Table 6 to account for the impact of economic activity within the state. In order to do so, it is important to recognize that the increased economic activity will also necessitate an increase in government expenditures to offset the growth. In order to estimate the magnitude, we looked to the number of new jobs created by the economic activity of military pensions (2,762). We multiplied the per-person government expenditure cost by the number of new jobs (adjusting for inflation) in order to estimate an overall increase in government expenditures of $17.7 million ($13 million at the state level and $4.7 million at the local level).⁶ Table 9 shows the revised fiscal impact of military retirees and their survivors in Idaho, including both pension and non-pension income, as well as induced economic impact.

^{Source: IMPLAN economic model analysis; U.S. Department of Defense, Office of the Actuary, data request; U.S. Census Bureau, American Community Survey, 2013-2017 (5-year estimates); U.S. Census, 2016 State & Local Government Finance Historical Dataset; Idaho State Tax Commission, 2018; IPI analysis}

Scenario Analysis

While Idaho already exempts military retired pay from state income tax for retirees age 65 or older, it does not do so for retirees under age 65. One of the overarching questions guiding this report is identifying the impact to Idaho of fully exempting military retired pay from state income taxation. What would it cost the state? How many additional retirees would it be necessary to attract to the state in order to offset the cost of the exemption? There are two ways to assess these questions: net impact neutrality or revenue neutrality.⁷

Net Impact Neutrality

Under the net impact neutrality option, the goal is to identify how many military retirees in Idaho would be necessary in order to ensure that the total net impact of income tax revenue remains approximately $19.3 million positively towards the state. In order to calculate this scenario, it is necessary to fully remove the $4 million of pension dollars from state income tax estimates in order to accommodate the (theoretical) full exemption.

With pension dollars fully exempt from state income tax, the net fiscal impact of each military retiree or survivor becomes $887 in state tax revenues and $60 in local tax revenues—or $947 total. In order to produce a net fiscal impact of $18.4 million in state tax revenue, Idaho would need an estimated 20,767 military retirees. This represents an increase of 4,158 retirees or survivors over 2018 levels, a 25 percent increase.

Alternatively, in order to produce a net fiscal impact of the full $19.3 million for both state and local revenue, Idaho would need 20,375 military retirees. This would constitute an increase of 23 percent over 2018 levels, or 3,766 retirees or survivors. Table 10 summarizes the net fiscal neutrality scenario. It is important to note, as we will discuss later, that over a ten year period from 2007 to 2017, Idaho’s military retiree and survivor population increased by 16 percent.

^{Source: Fiscal analysis by Idaho Policy Institute}

Revenue Neutrality

Under the revenue neutrality scenario in Table 11, the goal is simpler: ensure that state and local governments are not any worse off in terms of tax revenue (in this case, $90.6 million). When military pensions are fully exempted from state income tax, the income tax revenue received by the state for retiree non-pension income and economic activity associated with pension spending is approximately $1,158 per military retiree or survivor.

As such, in order to make-up the current $23.2 million in state income tax revenue, approximately 20,065 retirees are needed. This would be an increase of 3,456 over current levels, or 21 percent.

When sales tax revenues are added to this, we can see an overall impact to state tax revenues of $3,244 per military retiree. In order to offset existing state tax revenues of $57.9 million, Idaho would need 17,846 military retirees, which represents a 7 percent increase of 1,237 retirees over current levels.

With local property taxes added in, to produce the most comprehensive picture of tax revenue in Idaho, each military retiree would contribute approximately $5,214 in tax revenue. Under these parameters, 17,380 military retirees would be necessary to maintain revenue neutrality at $90.6 million—an increase of 771 over the current retiree population, or 5 percent growth. Again, it is useful context to keep in mind that from 2007 to 2017, Idaho’s military retiree and survivor population increased by 16 percent.

^{Source: Fiscal analysis by Idaho Policy Institute}

^{4 Since school districts are considered local governments, the Census’ 2016 State & Local Government Finance Historical Dataset reports no expenditures on K-12 education at the state level. Given that school districts are funded at the state level, however, we reclassified K-12 education funding to the state level to better reflect the balance between state and local government expenditures in Idaho. Note that this does not change total expenditures or total net impact, only the State/Local balance of these expenditures/impacts.}

^{5 Using the Census-derived demographic data, we sorted military retirees according to household income bracket. Each household income bracket’s proportionate share of total military pension payments was entered into the IMPLAN model to determine its induced effect on the statewide economy in Idaho. Full pension payments were entered into the model, as the untaxed pension income could still produce an economic effect.}

^{6 It is possible that this is too high an estimate for increased government expenditures. It assumes no economies of scale and that all new jobs added to the state’s population, for instance. That said, given this estimate’s ability to influ­ence the findings of the net impact neutrality model to determine military retiree population growth necessary to offset the cost of a full exemption of military retired pay from state income tax, we erred on the side of caution and used the more conservative estimate of a $17.7 million increase in government expenditures.}

^{7 The authors of this report wish to acknowledge that this methodology replicates one first used by the Kem C. Gardner Policy Institute at the University of Utah.}

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We now consider the context of Idaho’s military retiree tax policy by providing an overview of other state policies, recent exemption changes and states’ effective tax rates. Next, we compare the characteristics of Idaho’s military retirees to those of other states, gauging population numbers, ten-year growth, pension income, veteran share of population, military retiree share of veterans and active duty and reserve service member populations.

Overall, Idaho’s rankings on military retiree issues vary by topic. The state ranks relatively low on military retiree numbers, veteran numbers and military pension payments; near the middle on military retiree share of population and veterans; and high on military retiree population growth, veteran share of population and military pension percentage of total income.

State Tax Policy

Overview of State Income Tax Policies

Of the 41 states that directly tax personal income, only seven offer no exemption for military retirees. Among the states with income tax exemptions, 20 states grant full exemptions to military retirees while 14 states feature different types of partial exemptions. As noted, Idaho falls into the last category, allowing retirees over the age of 65 the opportunity to deduct certain amounts of their military pensions. This age-based qualification for exempt status is only seen in a handful of states, while most partially exempt states use a formula based on dates of service or a specific percentage of each military pension.

Idaho’s neighboring states have various policies on military retiree income. Washington, Nevada and Wyoming do not have a state income tax. Utah does not offer any form of military exemption. Similar to Idaho, Oregon and Montana offer partial income tax exemptions for military pensions, although their cost of living and effective tax rates are higher than Idaho’s.

Recent Military Retiree Exemptions

In an attempt to attract military retirees, some states have recently expanded their partial income tax exemptions for military pensions to full exemptions. Four years ago, only 15 states offered total exemptions. This number has reached 20 as of the beginning of 2019. Factoring in the number of states without an income tax, the number of states not taxing personal or military income recently exceeded the 25-state threshold—a majority of states.

In 2016, Maine and Missouri fully exempted military retirees from state income tax. Minnesota followed suit the following year. Arkansas’ exemption began in 2018. West Virginia became the most recent state to fully exempt military pensions from income taxation, the move officially becoming state law in 2019. Many other state governors and legislatures are seeking to exempt pensions in the near future. For example, South Carolina has been progressively increasing its military exemption while the state leadership pushes for a full exemption by 2021.

Utah’s Department of Veterans and Military Affairs recently commissioned a study analyzing the economic impact of exempting military retirees (the state does not offer any exemption). The author of this study determined that the loss to state revenue could be counterbalanced if the tax change increased the number of retirees moving to the state. However, because military retirees consider other lifestyle factors over tax policy in retirement decisions, they concluded that the potential tax exemption would be a long-term fiscal and economic cost to the state.

State and Local Taxes: Idaho in Context

^{Data Source: U.S. Census Bureau, Quarterly Summary of State and Local Tax Revenue, 2017; U.S. Department of Commerce, Bureau of Economic Analysis; IPI analysis}

Idaho’s individual income effective tax rate is already relatively low. At 2.5 percent, it ranks 30th nationally, just behind Missouri, Vermont and Georgia, and ahead of Maryland, Kentucky and Iowa. Compared to the state’s neighbors, this is a lower rate than Utah (3 percent), Oregon (4.5 percent) and Montana (2.6 percent), but clearly higher than no-income tax Washington, Nevada and Wyoming. A potential exemption from income taxation would only address this aspect of a military retiree’s overall tax picture. Since Idaho’s income effective tax rate is already regionally and nationally low, it is unclear how much it currently deters a retiree from choosing Idaho over another state.

The Idaho State Tax Commission released a report in 2016 comparing the tax burden in Idaho to that of other states.⁸ The state’s 8.8 percent total state and local effective tax rate is among the lowest in the nation and is virtually tied with Montana for lowest among all western states.

According to the study, Idaho’s tax burden is also favorable in other areas of taxation, including among western states. Idaho’s effective property tax rate is lower than eight other western states, and only higher than Nevada and New Mexico. A similar trend exists for sales tax, where Idaho has a lower rate than most western states with the exception of Utah, Montana and Oregon. Idaho’s burden rises for corporate income tax, which ranks third highest in the west and 24th highest nationally. Depending on a military retiree’s business aspirations, corporate income may be more or less significant than other taxable categories.

Comparisons of State Characteristics:

^{Data Source: U.S. Department of Defense, Office of the Actuary Statistical Report on the Military Retirement System, FY 2017}

Idaho’s 14,400 military retirees ranks near the bottom of all states’ populations. Regionally, the state trails neighbors Washington (74,600), Nevada (29,500), Oregon (21,000) and Utah (17,400), and leads Montana (9,500) and Wyoming (5,600)—consistent with the difference in overall population numbers between the states. However, military retirees constitute a larger percentage of Idaho’s adult population (1.1 percent) than in 30 other states. That proportion is fairly consistent with neighbors Washington (1.3 percent), Nevada (1.3 percent), Wyoming (1.3 percent) and Montana (1.2 percent), and higher than Utah (0.8 percent) and Oregon (0.6 percent).

Although Idaho’s ranking in number of military retirees is consistent over the past decade, the state has one of the fastest growing military retiree populations in the nation. During that same period of time, military retirees have grown by 16 percent, tenth highest nationally. This is consistent with general population trends. Idaho’s ten-year adult population growth is closer to 17 percent, the ninth highest rate. This relationship suggests that military retirees may be choosing Idaho for similar reasons as other adults who decide to move to the state. If these two populations grow at similar rates, and as Idaho continues to be a popular migratory destination, the state’s share of military retirees should continue to grow, even without a tax exemption.

^{Data Source: U.S. Census Bureau, annual population estimates}

Idaho’s military retirees receive $341 million in annual military pension income. Consistent with the state’s military retiree population, this figure ranks behind neighboring states Washington ($1.9 billion), Nevada ($750 million), Oregon ($467 million) and Utah ($417 million), and ahead of Montana ($222 million) and Wyoming ($131 million). However, in terms of economic impact, Idahoan retirees receive the 14th highest military pension payment as a share of the state’s total personal income. The only neighboring state with a higher military pension share of total income is Nevada (7th nationally).

^{Note: Dollar amounts have been adjusted for inflation to 2018 dollars.}

^{Data Source: U.S. Department of Defense, Office of the Actuary Statistical Report on the Military Retirement System, FY 2017}

^{Data Source: U.S. Department of Veterans Affairs, National Center for Veterans Analysis and Statistics, 2017 state summaries}

Approximately 120,000 veterans call Idaho their home, a comparatively small population as 38 states have more veterans. As a percentage of residents, though, veterans make up a sizable 10 percent of the adult population. Only 13 states have more veterans per capita. Surprisingly, four neighboring states have a higher share of veterans than Idaho: Montana (11.4 percent), Wyoming (11 percent), Washington (10.6 percent) and Nevada (10.4 percent).

Of the Idaho veteran population, nearly 12 percent are military retirees. That ranks the state just above the national median of 11 percent.

Among the state’s 8,900 current service members (ranked 40th), there is a 39 to 61 percent split between active duty and selected reserve personnel. Idaho has an estimated 26 active duty members per 10,000 adults (ranked 29th) and 4.3 military retirees per active duty member (ranked 17th). The state also has 42 reserve members per 10,000 adults (ranked 22nd) and 2.7 military retirees per reserve member (ranked 17th).

^{Data Source: U.S. Department of Defense, Office of the Actuary Statistical Report on the Military Retirement System, FY 2017}

^{8 The study calculates the state and local effective tax rate, which includes not only the individual income tax rate, but also property, sales and corporate income tax rates. This figure provides a more comprehensive outlook of the aver­age Idahoan’s tax burden.}

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This report examined Idaho’s military retiree population and its impact on the state’s economy. As of 2018, there are 14,661 military retirees in Idaho, which constitute approximately 11 percent of the state’s veteran population. Additionally, there are 1,948 survivors. While this retiree demographic has grown at an average annual rate of 1.9 percent since 2003, the data suggest most of this increase is among military retirees already over the traditional retirement age of 65.

Our findings indicate that military retirees tend to be more educated and affluent than other adults and retirees, with many pursuing a second career. In an effort to attract this demographic, many states offer partial or full tax exemptions. Idaho currently offers partial deductions to military retirees over the age of 65.

Our analysis suggests that Idaho’s military retiree and survivor population contribute approximately $90.6 million dollars in state and local tax revenue impacts. Additionally, we estimate that those governments spend approximately $71.3 million on services directly associated with those retirees, leaving a positive net impact to the state of $19.3 million.

When estimating the costs of exempting all military pensions from state income tax, our analysis indicates that Idaho’s military retiree population would need to increase by 5-25 percent, depending on the level of fiscal neutrality. This would constitute an increase of approximately 1,000 to 4,000 military retirees.

Of the 41 states that tax personal income, 20 offer full exemptions for military retirees, 14 have partial exemptions (including Idaho) and only seven offer no kind of exemption. If Idaho were to expand its current deduction, it would become the sixth state to implement a full exemption since 2016. However, the individual income tax is only one part of Idaho’s overall state and local effective tax rate.

We hope that this analysis is useful in informing the decision-making process as state policymakers consider the future of military retiree tax policy.

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The preceding analysis utilized data from a variety of governmental sources at both the federal and state levels. Data on the number of military retirees and their pension payments were obtained from the U.S. Department of Defense’s Office of the Actuary. Substantial analysis was completed using individual and household data from the U.S. Census Bureau’s American Community Survey (ACS). Additional data were collected from the U.S. Department of Veterans Affairs (VA), the U.S. Bureau of Economic Analysis (BEA) and the Idaho State Tax Commission to supplement our analysis. Economic analysis was greatly informed by the Kem C. Gardner Policy Institute’s report “Analysis of Military Retirees in Utah: Impacts, Demographics and Tax Policy” by Levi Pace.

In determining military retiree tax policies across different states, this report relies upon classifications used in a similar analysis by the Kem C. Gardner Policy Institute at the University of Utah (which uses 2014-15 data). To account for exemption changes since the Utah report, attention was directed towards states with partial and non-exempt status to see which states have recently expanded or begun expanding military pension exemptions. This was done by researching local news reports and legislative actions in each of those states since 2015.

Data containing states’ number of military retirees, age breakdown and pension income were retrieved from the U.S. Department of Defense’s Office of the Actuary’s annual Statistical Report on the Military Retirement System. The most recently published and cited data are from Fiscal Year 2017, but past statistical reports were also utilized for prior years’ data. The tax burden study cited is the Idaho State Tax Commission’s report “Comparative Tax Potential: Tax Burden in Idaho and the United States Fiscal Year 2016.”

To calculate the individual income effective tax rate, this report uses data from the U.S. Census Bureau’s Quarterly Summary of State and Local Tax Revenue. Data from 2017’s four quarters were aggregated to determine each state’s annual collected income tax revenue. The amount collected was then divided by each state’s total personal income for the year (calculated using data from Department of Commerce’s Bureau of Economic Analysis). The resulting percentage represents each state’s individual income effective tax rate for that year.

State adult population data are pulled from the Census Bureau’s annual estimates. Data for veteran share of this population and military retiree share of veterans are provided by the VA’s National Center for Veterans Analysis and Statistics (2017 state summaries). Numbers of active duty and selected reserve service members are found in Department of Defense’s DMDC Military and Civilian Personnel by Service by State report for June 2018.