The Michigan Supreme Court did not make any friends this month among this state’s baby boomers, who will soon swell the ranks of the retired. But its ruling Nov. 18 that Michigan can tax retirees’ pensions will have a significant impact for a state government that is expected to serve them.
The court, in a 4-3 decision, upheld the pension tax that Gov. Rick Snyder and state lawmakers approved this year. Many more state residents will now have to pay tax on pension income (excluding Social Security), just as they do on money they earn from a paycheck.
The ruling has a major short-term impact. It protects a revenue stream that the Snyder administration projected would be worth $330 million by the 2013 fiscal year. Without it, the governor and Legislature would likely scramble to put a Band-Aid on the state budget.
More important, preserving this tax on seniors fortifies Snyder’s attempts to reform Michigan’s tax structure so that it is fair and will sustain government for the long run.
Michigan, after all, has been a rarity in exempting pension income from taxes. While this will affect some retirees’ budgets, the reality is that many can more easily afford to sacrifice the hundreds or thousands of dollars than younger, working families. Michigan’s approach on this issue has amounted to a financial shift away from the young and toward the old.
State government, too, will now be able to collect taxes from retirees whose numbers should explode in the next two decades. That is fair, again, considering that they will add to the demand for state services, from public safety to inspectors for seniors’ residential facilities.
It is important to note that Snyder and lawmakers have not been out to merely cash in with this new pension tax. They are trying to build a sustainable tax system that promotes Michigan businesses, eliminates redundancy among local governments and, importantly, provides the state with a stable revenue.
At the same time, elected officials in Lansing have shown sensitivity to the concerns of seniors. They scaled back an original proposal to tax all pension income, instead limiting it to those born in 1946 or later. The compromise preserves the tax-free status for most pension recipients today, particularly those who entered retirement counting on a fixed level of income.
Practically, the court’s ruling create one $60 million issue for state government. The court struck down provisions that limited tax breaks for wealthier retirees; it said that amounts to a graduated income tax, which is outlawed by the state constitution. The Legislature’s clean-up for this mess should not be too dramatic: State lawmakers expect to have a surplus of around $400 million that should cover the shortfall.
This pension tax is not popular, and it may come back to hurt some lawmakers who voted for it. Yet that fact only makes that vote more courageous politically. In the long term, it will be good for state government and, by extension, all taxpayers.
— THE JACKSON CITIZEN PATRIOT