New tax on nest eggs passes Michigan House, Senate

Snyder

The state Legislature has narrowly approved a series of bills — largely along party line votes — that some are calling the largest tax code overhaul in Michigan’s history, featuring a removal of the exemption most retirees currently enjoy on their pensions, and a dismantling of the Michigan Business Tax (MBT) and replacing it with a 6-percent corporate income tax in a 20-19 Senate vote that needed the help of Lt. Gov. Brian Calley to break a stalemate.

“The Michigan Legislature made a powerful statement by passing these landmark reforms,” said Gov. Rick Snyder, who first proposed such measures earlier this year. “We are making the tough decisions and taking the bold actions necessary to put our state on the path to prosperity. Michigan’s complex, unwieldy and unfair tax structure has been a major impediment to economic growth. By bringing greater fairness and simplicity to the system, we are correcting longstanding inequities, protecting low-income families and paving the way for economic expansion.”

Later on Thursday, May 12, the House of Representatives concurred with the amended legislation, House Bills (HBs) 4361, 4362, and 4479.

State Reps. Hugh Crawford (R-Walled Lake, Wixom), Gail Haines (R-Waterford, West Bloomfield), Chuck Moss (R-Orchard Lake), Eileen Kowall (R-Highland, White Lake), and Bill Rogers (R-Milford) voted in favor of the legislation; while state Rep. Lisa Brown (D-West Bloomfield, Commerce, Wolverine Lake) voted against the bills when the House concurred in a 56-52 vote with the state Senate changes.

“I am committed to supporting the governor and his plan to bring economic prosperity back to Michigan,” Haines said. “I think this is a broad program that goes across the board. I do believe that it’s fair and, again, I want to support the governor. I think the last eight to 10 years have not been good ones for Michigan and I want to give the governor an opportunity.”

State Sen. Mike Kowall (R-Commerce, Highland, Milford, Walled Lake, Wixom, Wolverine Lake, White Lake, Orchard Lake, West Bloomfield) voted for the legislation when it cleared the upper chamber on Thursday, May 12, while state Sen. David Robertson (R-Waterford) cast his vote against House Bill (HB) 4361, an omnibus bill that includes the new pension tax provisions, as well as the overhaul of the business tax code.

Under the legislation, neither Social Security nor military pensions would be taxed.

The retirement income — public pensions, private pensions, 401(k)s and IRAs — for those born after 1952 will be taxed at 4.35 percent, with that rate dropping to 4.25 percent on Jan. 1, 2013. When those people turn 67, a senior income exemption will be available at a $20,000 level for single-filers and a $40,000 level for joint filers.

For those born between Jan. 1, 1946 and Dec. 31, 1952, their retirement income will be taxed above $20,000 if they are single filers and above $40,000 if they are joint filers.

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

In addition, effective Jan. 1, 2012, senior citizens born after 1945 will not be able to deduct a portion of interest, dividends and capital gains. The $600 exemption taxpayers enjoy for every dependent child under 19-years-old will also go away, as will the ability to deduct charitable contributions made from a qualified retirement plan or account. Also under the plan, the additional $1,800 exemption for each taxpayer 65-years-old and above, and each dependent of that taxpayer, is on the chopping block.

Kowall said that, while he typically wouldn’t even consider such a tax hike on retirees, certain safeguards were included in the legislation that protected low-income pensioners.

“I didn’t like that (the pension tax),” Kowall said last week. “That was not something that I would normally even look at, but it’s all part of the governor’s package to reinvent the state of Michigan, so we’ve all got skin in the game.”

“There’s going to be a projected — put that in bold print — additional taxes, additional money, but the majority of that is going to have to go toward paying down the liability on the pension funds,” Kowall said, referring to this week’s revenue estimating conference in which somewhere between $500 million and $700 million surplus of funds is expected to be collected for the general and School Aid Fund. “That’s a real, real dangerous thing. If we had to pay out all of the pension fund money that’s due out, there’s be nothing there to pay them. You get a lot of people standing out there throwing stones, but when you know what the bottom line is and what the numbers are, it’s a real scary thing. It can be fixed, but it’s going to take some effort and some shared sacrifices.”

Robertson, while praising Snyder’s “reform agenda,” said on the Senate floor that the removal of the pension tax exemption was too much for him to stomach.

“Gov. Snyder has advanced a strong reform agenda in all areas of state government, and I believe he is correct to do so,” he told his Senate colleagues. “We Senate Republicans have argued for reforms first. His efforts in all these areas have my support. I am concerned, however, that the inclusion of a pension tax increase and the interruption in the income tax cut will embolden those in opposition to his reform agenda and make the advanced reform agenda more difficult.”

As part of a deal struck last month between Snyder and legislative leadership, the scheduled drop in the state’s 4.35 percent income tax rate to 4.25 percent won’t take place until the beginning of 2013. It was scheduled to gradually drop to 3.9 percent by October 2015.

“With this vote, you value business taxes over local schools. With this vote, you are valuing businesses’ bottom lines over families who are struggling to make ends meet,” Senate Minority Leader Gretchen Whitmer (D-East Lansing) told her colleagues on the floor of the state Senate. “You are valuing a business tax cut over our seniors. You can lie to yourself, but don’t lie to me. Don’t lie to the people of our state. Don’t sugarcoat this to your constituents. When they ask you to explain your vote, be honest with them. Tell them you voted to increase taxes on individuals in order to support a tax cut to business, without any guarantee that it will create one job.”

The Michigan chapter of AARP has come out against the pension tax, saying that it would “unfairly burden fixed-income retirees already beset by rising food and fuel prices, diminished community services and skyrocketing health care costs.”

According to the National Council of State Legislatures, of the 41 states that have an income tax, Michigan is one of just 10 that don’t tax most pension benefits.

All told, according to a House Fiscal Agency analysis, the bills would reduce state revenues by $453.8 million in Fiscal Year 2011-12, which begins Oct. 1 and ends Sept. 30, 2012; and $192 million in FY 2012-13. General fund revenues would increase by $225.7 million the next fiscal year, and $465 million the following budget cycle. School Aid Fund revenue would dip by $679.5 million and $657 million in FY 2011-12 and FY 2012-13, respectively, analysts reported.

Changes in the business tax structure — the repeal of the MBT and replacing it with the corporate income tax — is expected to cost the state $1.02 billion in General Fund and School Aid Fund revenue during the next fiscal year, with that figure jumping to $1.67 billion in FY 2012-13. Changes in the income tax structure, including getting rid of the pension tax exemption, are expected to net the state $571 million next fiscal year and $1.47 billion in FY 2012-13.

The entire legislative package is expected to cost the state $453.9 million during the next fiscal year, and $192 million in FY 2012-13, analysts report.