No Tax on Police Officers, Firefighters, Veterans, and Active Duty Military: Basic Background

In total, 19 million people fell into one of the covered VUPS categories in 2023, accounting for roughly 6% of the population (Table 1).² Of these, just over half—ten million—were employed in 2023. The nine million not employed were overwhelmingly accounted for by veterans, most of whom were retired. 

As a cautionary note up front, it is difficult and highly uncertain to reliably estimate the 10-year cost of the exemption former President Trump floated last week. Behavioral responses in particular are a first order consideration. For example, it would be reasonable to assume that in the face of an income exemption for these occupations, more Americans would seek out these jobs in order to avoid federal taxes. In addition, depending on how the exemption were structured — if one could exempt all of one’s income if one was in one of these occupations there would be an incentive to take a part-time job in one of these occupations to ensure that other income was not taxed. Without more details from the Trump campaign, it is difficult to be precise.

Exempting veterans’ income is especially significant given that it has the potential to grant a lifetime of tax-free income to an individual even after they leave military service. This would increase the cost above the TBL estimates here, likely to a significant degree.

That said, even ignoring behavioral effects, exempting 19 million Americans from federal taxation is a substantial proposal. A starting point for sizing the idea is to know how much such an exemption would have cost in the recent past. For this, TBL turned to the Current Population Survey Annual Social and Economic Supplement (ASEC) for 2024, which contains income and tax data for tax year 2023.

Using the CPS ASEC, TBL estimates that filers in covered occupations accounted for $145 billion in federal individual income tax revenue in 2023 and $120 billion of both employee- and employer-side payroll taxes.³ That’s roughly 7% of 2023 income and payroll tax revenues and, combined, 1% of GDP, which, incidentally, is almost exactly the amount the US spent on veterans programs and military retirement combined in 2023 ($242 billion).

On average across all taxpayers, an income tax exemption would have raised after-tax income by 1.3%, while an income tax and payroll tax exemption would have raised it by 2.4%, but as Figures 1-4 show, the actual benefits would have varied significantly by income. Tax savings from this type of exemption would have been highest at the top decile in 2023 dollar terms, with an average benefit of $40,000 income tax exemption /$58,000 income + payroll tax exemption respectively for beneficiaries in the top decile. As a share of after-tax income, the strongest effect comes in the 9^th decile for the combined exemption. More than half of the aggregate tax benefit would accrue to the top two deciles. 

Looking forward, under conventional assumptions (e.g. no assumed employment shifts towards these occupations), TBL estimates that a military, veterans, and first responders exemption would cost roughly $2 trillion over the next decade (0.6% of GDP) if it just applied to individual income taxes, and $3.6 trillion (1% of GDP) if it exempted employee and employer payroll taxes as well (see Table 2). These estimates are against a current policy⁴ baseline wherein the expiring provisions of the Tax Cuts & Jobs Act of 2017 (TCJA) and all other tax provisions expiring under current law are fully extended.

A VUPS exemption would carve at least 19 million people out of the federal tax code. In reality, this number would likely grow as more Americans sought out occupations that promised tax-free income. Putting these considerations aside, TBL estimates such an exemption would cost $2-3.6 trillion over the next decade (0.6-1% of GDP). The proposal would be regressive, with generally higher benefits at higher incomes.