Summary
SB-1 seeks to exclude military retirement and Survivors Benefits Plans (SBP) income from state income tax.
Background
Those who serve at least twenty years in the armed forces qualify for military retirement. These individuals return to their communities and often rejoin the workforce.
Much like a life insurance policy, SBP’s are an optional benefit that many military service members opt to pay into. These plans collect a portion of the member’s paycheck and in the case of death, the beneficiary (spouse or child) receives up to 50% of the service member’s retirement income. Since the SBP are issued in proportion with the deceased service member’s retirement income, they differ from a life insurance plan which is considered non-taxable income. While life insurance payments are tax free, these payments to widowed spouses and children of deceased service members are subject to state income tax.
Currently, 49 states either partially or fully exempt military retirement and SBP payments, leaving California as the only state in the country fully taxing these earned benefits. Since 2016, California has consistently seen an annual decline in recipients of these benefits with a median drop of over 1,000 people a year, resulting in California going from the number one state in the country in number of recipients of SBP to third in the country, as of 2020. This drop also reflects the number of military retirees, where California has consistently lost retirees every year since 2016 with a median drop of 2,600 people a year. This drop is uncharacteristic to the rest of the nation which has seen increases in both SBP participants and retirees. The loss of both populations from California has resulted in over $558 million leaving the state in federal retirement and SBP payments.
Proposal
With just over 27,000 military survivors receiving SBP payments and just over 141,000 military retirees within California, it is imperative that California provide relief.
SB-1 seeks to relieve the families of our service members from the undue burden of taxes from retirement and SBP payments. These families and survivors have paid the highest price for our state and nation. It is long overdue that California join the rest of the nation in providing relief to these families.