Legislation would end taxes on Social Security payments

A bill that would end federal taxes on Social Security payments faces long legislative odds this fall, and the prospects for broader reform of the entitlement program will depend on the political makeup of Congress next year.

Last month, Rep. Angie Craig, D-Minn., introduced the You Earned It, You Keep it Act, which would eliminate taxes on Social Security benefits starting in 2023. She said the bill is a way to ease inflationary pressures on seniors by enabling them to keep more of the money they receive from the entitlement program.

“Eliminating this tax will help Social Security benefits go further and ensure that American retirees have all the resources they need after a lifetime of hard work,” Craig said in a statement.

The bill, which does not yet have co-sponsors, is a long shot this year, as the legislative calendar dwindles. Craig serves on the House Energy and Commerce Committee, which is a House panel with jurisdiction over Social Security.

“The prospects of action this year are nonexistent,” said Bill Arnone, chief executive of the National Academy of Social Insurance.

The way that Craig pays for eliminating the tax on Social Security payments adds to the political challenge it faces. She is proposing to impose Social Security taxes on individuals making more than $250,000 annually. The tax is currently capped at $147,000.

“That would make it politically tricky to get broader support,” said Garrett Watson, senior political analyst at the Tax Foundation, a think tank that specializes on tax issues. “I would be surprised if it’s considered [this year] given the nature of the offset.”

The idea behind Craig’s bill also is included in broader Social Security legislation that was introduced last year by Rep. John Larson, D-Conn. His Social Security 2100 bill has only Democratic support and also has little chance of being enacted this year — even as part of an economic package cobbled together during a lame-duck session of Congress after the election.

The November vote will go a long way in determining whether Social Security reform gains momentum in the new Congress that begins in the January.

Tackling Social Security is like putting their “hand in a raccoon sack” for lawmakers, said Dean Zerbe, national managing director at alliantgroup, a tax services firm. “It’s going to take a strong majority. It would take the Democrats having an extraordinarily good [election] night for that to happen. I can’t see there being a bipartisan run” on entitlement reform.

Social insurance programs have become a timely political issue once again, Arnone said. In October, the Social Security cost-of-living adjustment for 2023 will be announced. The Medicare premium is expected to decline next year. Older voters are paying attention to both.

“It’s a one-two political punch,” Arnone said. “The prospects of Social Security [reform] depend on the election, and the environment is set for Congress to take action in the next session.”

In the meantime, there's something to be gained from putting a reform idea into legislative form.

“It makes it more tangible and real than ephemeral,” said Zerbe, a former Republican tax counsel on the Senate Finance Committee. “Having a bill in some sense moves it forward.”

Social Security payments have been taxed since the early 1980s. Reforming those taxes — and the program generally — will be a heavy lift. One challenge is to do it in such a way that doesn’t cause “horizontal equivalency” concerns, Watson said.

That situation occurs when some taxpayers get more of a benefit than others from something like the elimination of taxes on Social Security payments, depending on how important the payments are to their finances. Broader tax reform could be an answer.

“Some of this may be better tackled through a conversation on a more progressive tax code,” Watson said.