Assembly subcommittee reviews Governor's proposal to partially exempt military retirement pay from state income tax

Assemblymember Sharon Quirk Silva convened Subcommittee No. 5's hearing on Feb. 18, 2025 and first took up the Governor's proposal to partially exclude military retirement pay from California taxable income.

Robin Finestad of the Department of Finance described the administration's draft budget proposal, saying the measure would exclude from state taxable income retirement pay received from the federal government for service in the uniformed services and annuity payments made under the Department of Defense Survivor Benefit Plan. The exclusion would be available to individuals and heads of household with adjusted gross income up to $125,000, and to joint filers with AGI up to $250,000. The proposal would cap the exclusion at $20,000 of retirement income per taxpayer per taxable year, the department said.

Chaz Alamo of the Legislative Analyst's Office (LAO) said the proposal would provide tax relief for the small share of Californians who receive military retirement pay (LAO estimated roughly 40,000 retirees out of about 1.4 million veterans reside in California). The LAO estimated the benefit would be modest for an average retiree, on the order of about $600 annually, and cautioned that the proposal is unlikely, on its own, to be a strong economic incentive to change retiree location decisions.

Several members of the committee expressed support for the policy objective of retaining veterans and their economic contributions while asking for additional analysis of the fiscal tradeoffs and the distributional effect of the income caps. Assemblymember Ward and other members said they have heard anecdotal reports of retirees who say they are considering leaving California for lower-tax states and urged staff to examine thresholds and budget impacts.

Public testimony included representatives of the California Association of County Veterans Service Officers, Vets in Tech, American Legion (Department of California), Veterans of Foreign Wars, the California Enlisted Association (National Guard), and several individual retirees. Commenters urged the Legislature to expand the benefit and cited retention and local economic contributions as rationales for broader exemptions.

The Department of Finance provided a budget estimate for the Governor's partial-exemption proposal: a $130 million revenue loss in 2026 and $85 million ongoing thereafter, figures presented by DOF at the hearing. The LAO and members requested additional modeling and analysis of alternatives (for example, a larger exemption or higher AGI thresholds) before the subcommittee advances a final recommendation.

No formal action or vote was taken; the item was heard as an informational budget hearing and members directed staff to pursue further data and fiscal analysis.