Study shows state tax policies attract, deter retirees

MORGANTOWN -- Property and estate tax policies are among the lures West Virginia can use to keep residents here after retirement or even attract them from other states, according to a study recently released by the West Virginia University College of Business and Economics.

However, the study also found that West Virginia's personal income and sales taxes might hinder the state in its competition with other states to attract and keep well-heeled retirees.

Understanding how older populations affect communities has become increasingly important as the national population ages. And West Virginia is at the forefront of the nation's aging, with the highest median age and the third largest share of citizens aged 65 and over.

"Retirees and Economic Development in West Virginia," authored by economists in the College's Bureau of Business and Economic Research (BBER), examines the economic significance of current and potential new retirees in West Virginia.

The study looks at such factors as the influence of public policies on retirees' decision to stay or move into West Virginia, characteristics of the retiree population in the state, retiree migration patterns, retiree income and spending patterns, political influence of retirees, and the economic impact of retirees and retirement communities on state and local economies.

Although budgets will groan when "Baby Boomers" begin to collect social security and Medicare benefits, they bring compensating assets to a community. Overall, they have a higher income, more private wealth, and appear less likely to live in poverty after they retire compared to their parents at the same age. At least half of them are likely to maintain their working-age standards of living during retirement.

The study found that West Virginia does not attract many retirees. According to the 2000 U.S. Census, West Virginia had a net migration rate of -3.4% for those 65 and older, compared to the 30% average net migration rate for states in the south Atlantic region. Considering the possible effect of tax policy on retiree retention and attraction, the study notes that West Virginia had one of the highest state tax burdens, ranking third with 8 percent of state personal income being paid in taxes. However, this ranking is based on state taxes, so the smaller local tax burden may counterbalance this. The fact that West Virginia does not offer exemptions for social security, private pensions, food or non-prescription drugs is also a disadvantage in the competition for retirees.

However, West Virginia does rely much less heavily on property taxation compared to other states (19.4 percent compared to the national average of 30.85 percent), and retirees look favorably on the state's tax relief programs, particularly the homestead program, and property tax rate limits. In addition, West Virginia will not have an estate tax when the federal estate tax is eliminated, nor does it have separate inheritance or gift taxes. These aspects of the state's tax policies may give the state an edge over is neighbors in retiree attraction.

Looking at the influence the retired population might have on public policy, the study considered the possibility of a generational conflict between retirees and working young over such spending issues as medical benefits and education. The 2002 voting statistics from the U.S. Census shows that the percentage of persons registered to vote and who actually vote does increase with age.

"While the evidence of such conflict is not very strong for now," said Mehmet Tosun, research assistant professor and lead researcher for the study, "it could possibly escalate to a critical level in the near future."

The economic impact produced by retirees is substantial, according to the study, but the size of the impact depends on the income level of the migrating retiree. Higher income retirees would bring considerably higher economic and tax revenue impact. A high-income ($70,000 +) retiree in-migrant is estimated to generate $10,000 in state tax revenue alone.

Data gathered in one retirement community in the Morgantown MSA indicates that the total impact on business volumes was $7,045,000 in sales, with over half of these sales coming from direct impact. A total of 83 jobs were created, with a total of $2,319,000 in employee compensation. Among industry sectors, health and social services captured the largest portion of the economic impact.

"This study clearly points to the potentially large impact retirees, particularly the affluent ones, could have on the state's economy and revenue streams," Tosun said, "It also shows the need for more extensive research into the use of state fiscal policy for retiree attraction. The potential gains from targeting that group are large, but so are the possible risks."

This study was funded by the Bernard McDonough Foundation of Parkersburg and is an update on the 1995 BBER study commissioned by the Community Living Initiatives Corp. It is available on the BBER Web site at www.be.wvu.edu/bber