California proposes military retirement tax exemption in budget plan for 2025

The California State Assembly's Budget Subcommittee No. 5 convened on February 18, 2025, to discuss a significant tax proposal aimed at providing relief to military retirees. The proposal, effective from the 2025 tax year, seeks to exclude from state income tax retirement pay received from the federal government and annuity payments under the Department of Defense Survivor Benefit Plan. This exclusion is targeted at individuals or heads of households earning up to $125,000, and joint filers with incomes not exceeding $250,000, with a cap of $20,000 in retirement income per taxable year.

Currently, California is the only state among the 41 with a personal income tax that does not offer any form of exemption for military retirement income. The proposal aims to align California with the 29 states that fully exempt military retirement pay and the 11 states that provide partial exemptions. The intent is to offer tax relief to military families and enhance California's appeal as a retirement destination for veterans. However, the proposal is projected to result in a revenue loss of $130 million in 2026, with ongoing losses of $85 million thereafter.

Chaz Alamo from the Legislative Analyst's Office provided insights into the proposal, noting that while it would offer some tax relief—approximately $600 for the average military retiree—it may not significantly influence the decision of veterans considering retirement in California. He emphasized that the proposal, while a step towards providing relief, lacks strong economic justification and may not effectively attract military retirees compared to states with more favorable tax policies.

Assemblymember Ward expressed support for the proposal, highlighting concerns about the potential exodus of military retirees from California due to economic factors. He suggested that the proposal could be adjusted to better benefit a broader range of retirees, particularly those with lower incomes.

Several representatives from veterans' organizations voiced their support for the proposal, emphasizing its importance in retaining military retirees in California. They acknowledged the modest nature of the proposed benefit but advocated for future enhancements, such as increasing exemption limits and adjusting income thresholds to reflect California's higher cost of living.

The meeting concluded with a consensus on the need for further discussion and potential adjustments to the proposal to ensure it effectively supports California's veteran community while considering the state's budgetary constraints. The subcommittee plans to continue evaluating the proposal and its implications for military retirees in the state.