Demographic Change and the Future of State Income Taxes

Four factors suggest that population aging will have a larger fiscal impact in states with a high reliance on income taxes than in states with a high reliance on other taxes. First, as postulated by life-cycle consumption models, retirement has a larger impact on income than consumption. This life-cycle effect causes income tax receipts to fall more than sales tax receipts. Second, slower macroeconomic growth, which may occur because of population aging, will disproportionately impact income tax receipts. Third, preferences accorded elderly taxpayers substantially decrease income tax receipts. Fourth, the migration of high-income elderly taxpayers has an especially large impact on state income tax receipts