State income tax on pensions

Mar 4, 2011

When he presented his budget to the legislature, Governor Snyder explained part of the shared sacrifice would be taxing public and private pensions.  There is no state income tax on pensions right now.  The Governor noted, retirees still use government services.  He also said there are some retirees who are still working, paying the current 4.35% in state income taxes.  He said taxing pensions is a matter of fairness to people of retirement age who are still working.

“And that senior that’s still working is paying 4.35%.  So, it’s not to take away from something from someone, but simply to ask them to be with the rest of us in a fair fashion.”

The Governor was quick to note the state would not tax all retiree benefits.  He said there would be no income tax on Social Security benefits--  although the state never has taxed Social Security.

The Snyder administration stressed if the state of Michigan was going to have stable budget, it had to spread out the tax burden.

State Budget Director John Nixon says the number of retirees in Michigan is growing.  The state needs to tax pensions.

“You know, by 2030, one-in-five residents here in Michigan is going to be retired.  And if we’re exempting retirement income from the tax rolls, it just creates a bigger burden on your younger generation.”

Nixon asks, 'Why should a young couple just starting out be taxed more when people receiving pensions pay no state income tax at all?'

But advocates for retirees say this is not about whether older or younger residents pay taxes, this is about raising taxes on senior citizens and the working poor to lower taxes for business.

Eric Schneidewind is the State President of AARP

“The Governor’s budget basically takes seniors and raises their taxes about over $1.1-billion, has about $600-million of other income tax increase on low-income people, poor people and gives every single penny of that to reduce business taxes.”

And for seniors, it’s not just the income tax on pensions. 

Gary Olson is with Public Sector Consultants.  For 20 years, he was the Director of the Senate Fiscal Agency.  He recently released a report which explains seniors also will lose some tax exemptions and credits. 

“They’re losing a special additional exemption they have, some exclusions of dividend and interest income that they have, they’re going to lose with a proposed change under the homestead property tax credit.”

The Snyder administration says it is protecting low-income seniors, and they won’t see higher taxes.

But middle-class retirees who receive pensions find little comfort in that.

Eric Schneidewind at AARP says there’s no ‘value for money’ for seniors.

“Not one penny of these tax increases  will go to stop our roads and bridges from crumbling.  Not one penny goes to help schools.  Not one penny goes to help police and fire protection locally.  Every single penny goes to reduce business taxes.  You cannot separate the two.  There is no benefit for seniors in this proposal.”

And there might be some legal issues with the Governor’s proposal to tax pensions, at least public pensions.  Gary Olson says the Michigan Constitution might prohibit an income tax on some of those pensions.

“When I worked in the legislature, we were told legally we couldn’t tax public pensions of people that had already retired and that’s what they’re proposing.  So, I think there’s going to be--  if this proposal on the pensions, public pensions, goes, there’s definitely going to be litigation.”

There is opposition to an income tax on pensions, but there are also retirees who seem to be resigned to it… as a matter of fairness.

State Budget Director John Nixon says nobody likes the idea of paying more in taxes, but they understand…

“I had a guy tell me, ‘I’m not nice enough to send you a check, but I do think we ought to be contributing to the tax system.  We partake of the benefits, we ought to pay.’”

But there are pensioners calling their legislators, protesting vehemently against the tax.  And legislators know senior citizens have the time to be politically active.  And they vote.