Pension tax proposal brings revenue, parity to Michigan

Like many in the state, we too were somewhat befuddled when it was initially announced that Gov. Rick Snyder had a plan to remove the tax exemption Michigan residents enjoy on their pension income. The details hadn’t been hashed out. Interest groups hadn’t chipped in their two cents two months ago when the general concept was floated in the “tough nerd’s” proposed $45.9-billion budget for Fiscal Year (FY) 2011-12, which begins Oct. 1. But now we know what it would look like under a tentative outline hammered together between Snyder and legislative leadership. And while not pretty or ideal, the proposal would inject badly-needed revenue into state coffers while bringing Michigan up-to-speed with the vast majority of the rest of the country.

Under the tentative agreement on the pension tax, neither Social Security income nor military pensions would be subject to the state income tax, which is currently set at 4.35 percent but was scheduled to drop to 4.25 percent. A personal exemption of $3,700 per person would be included, indexed to the rate of inflation.

Those born after 1952 would bear the toughest burden under the proposal since their retirement income — including public and private pensions, 401(k)s and IRAs — would be taxed at 4.35 percent, with that rate slated to be cut to 4.25 percent on Jan. 1, 2013. When those people hit 67-years-old, a senior income exemption would be available at a $20,000 level for single-filers and a $40,000 for joint income tax filers.

Michigan residents born between Jan. 1, 1946 and Dec. 31, 1952 would have their retirement income taxed above $20,000 if they are single filers and $40,000 if they are joint filers. When those people turn 67, they would qualify for a senior income exemption at a $20,000 level for single-filers and a $40,000 for joint income tax filers.

For those born before 1946, their private pensions — if under $45,120 for single-filers and $90,240 for joint filers — would be taxed at 4.35 percent, with that level dropping to 4.25 percent starting in 2013. Public pensions would not be taxed under the tentative deal, and 401(k)s and IRAs would be treated the same as under current law, Snyder announced.

An additional $150 million in cuts would be needed under the tentative agreement to keep the pension tax from affecting those who are 67-years-old or older as of Jan. 1, 2012.

So needless to say, it’s a gutsy move, and one which could hurt Snyder’s re-election bid if he chooses to seek a second term in office. The new governor has dropped in polls recently, and seniors, 1.4 million of whom are represented by the AARP of Michigan, are a major — and reliably active — voting bloc in the state, as they are elsewhere.

And they have legitimate gripes about the proposal, particularly after working their entire lives — at blue-collar and white-collar jobs alike — under the assumption that their pension income would be held harmless from the long and unwieldy arm of the state Department of Treasury. That could have serious consequences for some retirees.

We understand that. We wholly sympathize with the outrage, particularly in Oakland County, where a substantial chunk of the citizenry would be affected almost immediately. We aren’t thrilled about it either, and likely will gripe about it when we hit retirement age. But frankly, income is income, whether it’s from a full-time job or from a pension, and income is taxed, whether we like it or not.

Plus, there are two other key factors at play.

First, the state budget is effectively the only issue on the table in Lansing right now. Year after year, feckless leadership in the state capitol — from both Democrats and Republicans — has used one-time fixes to balance the state’s spending plan. One year, it’s using federal stimulus dollars to plug a gaping $1 billion-plus hole. Another year, it’s decapitating state shared revenue payments. In 2007, Michigan residents were the ungrateful recipients of a 0.45-percent hike in the state’s income tax from 3.9 percent to the current 4.35 percent. And all of those got the state nowhere. And the end is nigh for Michigan as we know it unless drastic and, in all likelihood, unpopular changes are made.

Estimates released in February projected that the state would net $1.7 billion from the repeal of the pension tax exemption, although concrete figures on how much the compromise plan would inject into the state’s coffers.

Second, Michigan is one of only three states in the entire nation that exempts all or most of retirees’ pension income from taxation, according to the first-term governor. The Snyder administration cites a declining Michigan population but one that’s still aging as the main reason why the state can no longer afford to forego that revenue. They also point out that the state’s senior population is expected to rise to nearly 20 percent by 2030.

In addition, the more measured, phased-in approach than the one put forward two months ago should help the bitter horse pill go down a little easier. But the state’s budget is hemorrhaging. The revenue is needed. Bringing the state to the same playing field as virtually the rest of the nation is logical. And Michigan can no longer afford to keep looking for the playing field while the rest of the kids have been there since the start of the game.