LINCOLN — Tom Frederick graduated from Bellevue West High School and still bleeds Husker red.
But when he sought a place to retire after completing his military career at Offutt Air Force Base, Frederick looked outside the state.
One of the reasons: Nebraska, like only four other states, fully taxes military pension income.
“I like Nebraska. I'm a Husker fan. I still consider myself a Nebraskan. But the government there takes too much out of my pocket,” said Frederick, who now lives on a 40-acre Iowa horse farm just across the Missouri River, near Malvern.
Nebraska officials, including Gov. Dave Heineman, are taking a closer look at how the state treats its military retirees, and retirees in general. It's also an issue in Iowa, which offers only slightly better tax benefits on pension income.
In Nebraska, how retirees are treated is a black eye in a state tax system that has improved markedly in its treatment of businesses.
Nebraska's lack of any tax break for Social Security recipients, plus the lack of tax help for military veterans, inspired Kiplinger in September to rank Nebraska No. 6 among the 10 states “least friendly” to retirees.
Heineman, who keeps a keen eye on such state tax rankings, said the state's retirees need some help.
“That's an area where our ratings aren't very good,” the governor said.
Heineman is exploring a range of reforms in state income taxes, including breaks for military retirees and other retirees, as well as complete elimination of the state income tax — an idea introduced last year in neighboring Kansas and Missouri.
There is some urgency; Iowa and Missouri are both phasing out income taxes on Social Security checks, leaving Nebraska alone among its neighboring states in providing no tax break for such income. In addition, all neighboring states offer at least some tax break on military pensions, while Nebraska offers none.
Iowa fared only slightly better in the rankings by Kiplinger, which doles out financial advice and business forecasts, being rated as “unfriendly” but not among the bottom 10.
Iowa allows retirees age 55 and over to exclude the first $6,000 in pension income of all kinds, including military pensions and Social Security, from state taxes.
Proposals in Iowa to offer more generous tax breaks for military retirees have been introduced in recent years but not adopted. In Nebraska, measures to offer some tax break have failed as well, in part because of the lackluster economy and in part due to higher-priority tax issues.
Even though Iowa offers some tax relief for retired military, more generous breaks in other states give them one more reason to move away, said Jodi Tymeson, director of the Iowa Department of Veterans Affairs.
“Iowa would like to be competitive with other states in recruiting and retaining veterans,” Tymeson said.
The interest in tax breaks for veterans and retirees in general comes as states like Nebraska and Iowa emerge from budget woes caused by the Great Recession.
Now that tax revenues are rebounding, states are starting to look at tax breaks they might have dismissed when times were tougher.
And tax breaks for retirees are a popular political subject as the influence and percentage of senior citizens grow. In Nebraska, for instance, the percentage of the population age 65 and older is projected to rise to 16 percent by 2020, an increase of 3 percentage points since 2003.
State Sen. Abbie Cornett of Bellevue, who has pushed tax breaks for military retirees during her eight years as a lawmaker, said she's encouraged the issue is getting more discussion. But one hurdle that's killed the idea in the past, and still remains an issue, is how the state gets by without the tax revenue.
“That's the $10,000 question,” Cornett said. “We don't treat our retirees very well. But how do we afford (tax breaks)?”
In 2009 it was estimated that granting all Nebraska military veterans an exemption from taxes on their pensions would cost $22 million to $24 million a year. Getting rid of taxes on Social Security was more costly, estimated at $66 million a year.
If Nebraska were to offset those tax cuts, dollar-for-dollar, with the state sales tax, it would require an increase of more than one-fourth of a cent.
There's also a question of priorities. Sen. Norm Wallman of Cortland said the top tax problem in Nebraska is high property taxes, and he hears regularly from retirees about that issue.
But tax breaks on pensions would affect a lot of pocketbooks.
About 14,100 military retirees currently live in Nebraska, according to the most recent estimates by Offutt. About 12,700 live in Iowa, according to legislative estimates there. One in six Nebraskans — or 308,790 people — were on Social Security as of 2010, according to the AARP. One in five Iowans, or 584,113 people, get Social Security.
In both the Cornhusker and Hawkeye States, three in 10 people age 65 or older have Social Security as their only source of income.
Nebraska State Sen. Jeremy Nordquist said he sees that firsthand in his South Omaha district: older retired couples living on fixed incomes.
Coupled with the state's harsh winter weather, the poor tax climate leaves Nebraska uncompetitive for retirees, Nordquist said. He said he's planning to reintroduce a bill to phase out taxes on Social Security.
Last year both a liberal group, Bold Nebraska, and a conservative think tank, the Platte Institute, backed Nordquist's proposal.
The Platte Institute considers taxing Social Security as “punitive” and “a double tax,” because senior citizens have already paid payroll taxes while they were working. The organization also supports exempting military pensions.
“Nebraska isn't kind to folks on Social Security or military pensions. It always pulls the state down on the retiree attractiveness rankings,” said John S. McCollister, executive director of the Platte Institute.
Mark Intermill of the Nebraska chapter of AARP said that Nebraska, which has a tax system linked to the federal system, got an unexpected windfall in the mid-1980s when the federal government began levying taxes on Social Security income. But unlike 45 other states, Nebraska never passed a partial or full exemption, he said.
AARP, he said, doesn't want to “blow a hole” in state tax revenues, so it is also looking at less-costly alternatives to a full exemption on Social Security.
One possible idea, Intermill said, would be to increase the incomes at which senior citizens must start paying taxes. That hasn't been adjusted since the 1980s and currently stands at $25,000 a year for an individual and $50,000 for a couple.
But the question is, if you exempt some pension income, where do you stop? An exemption for Social Security only? Or should exemptions also, or only, be granted for military pensions? How about teacher pensions? The more exemptions granted, the less revenue for government — which could mean cuts in services or higher taxes or fees elsewhere.
Intermill said: “From my perspective, it's best to try and provide some relief to those who are really struggling.”
It should be noted that at least one group of retirees in Nebraska does get a tax break on its pension income: Railroad retirees get a federal exemption from state income taxes.
Proponents of further tax exemptions on retirement income argue that the reduction in tax revenue would be more than offset by keeping more senior citizens from moving away and retaining the sales and property taxes they pay.
Roger Rea, a representative of the Nebraska State Education Association, said earlier this year that 10 percent of teachers and state workers leave the state upon retirement, in part because of poor tax treatment. If that were reduced to 1 percent out-migration, Rea said, the state would gain $120 million in tax revenue.
Arguments for aiding military retirees are more complex and key on economic development.
The average age of a military retiree is in the mid-40s. Many own houses and have families and kids in school. Most seek out second careers.
They are prized, potential employees for private contractors who serve Offutt because of their specialized and often high-tech skills. Many of the younger retirees also have security clearance on the base, which can otherwise be expensive and take a year to obtain.
Though the job market for defense contractors has softened somewhat because of federal budget cuts, Sen. Cornett said she still hears from contractors who cannot fill jobs, in part because of Nebraska's lack of tax breaks for military retirees.
“It's great to retain people in Nebraska who are highly trained, have great work ethic and have technology experience,” the senator said.
While the lack of tax breaks is not the only reason that retired military vets move elsewhere, it's a contributor, said Jim Ristow of the Bellevue Chamber of Commerce.
It contributes to a “brain drain” of skilled workers still in their prime, he said.
Frederick fits the profile. He's 40 and his specialty was servicing airplanes. He served in the Army for several years and was stationed at the Pentagon when terrorists flew a passenger jet into the massive compound on 9/11.
“We thought a car bomb went off,” said Frederick, who saw the impact from the opposite side of the structure as he walked to his car. “We really didn't know what was going on at first. It was something bad.”
In 2004 he switched to the Air Force, and he later served in the Air National Guard. One of his final duties was keeping watch on the levees around Eppley Airfield during the floods of 2011.
When he went looking for an acreage to buy in 2000, Frederick looked on both sides of the river. But land in Iowa was cheaper, and the overall cost of living, including taxes on gas, vehicles and property, was lower.
Frederick doesn't yet qualify for Iowa's partial tax break on pensions because he doesn't meet the 55-year-old age requirement. Nonetheless, if Nebraska had offered a tax break on his pension, he probably would have stayed west of the river.
“I want less of it taken away,” Frederick said of his pension.
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