Michigan's biggest tax overhaul in seventeen years passed by the state's Legislature and signed by Governor Rick Snyder in the year 2011, finally goes on the books in January this year. It eliminates MBT (Michigan Business Tax) while bringing package of changes to the personal income tax that also includes remodeling of state's pension tax structure. This controversial piece of legislation could only pass after swelling generational tension among Michigan's residents. So far, it has remained highly unpopular among retirees or those approaching a retirement age, but is widely acknowledged by younger Michiganders who seek some contribution from its older generation in "reinventing Michigan".. Most debated provision of this newly enacted legislation is Michigan's reformed three-tiered pension tax. It maintains the status quo for those who are 67 and above and fully taxes pensions of individuals who are below 67. According to this law:
- All public pension income for those born before 1946 is exempt from the new tax. Income from private pensions will also not be taxed on amounts up to $45,120 for single filers and $90,240 for joint. Social Security and military pensions will not be taxed as well.
- Those born between Jan 1, 1946 and Dec 31, 1952 will have their retirement income taxed at 4.35%. However, they will still receive a pension tax exemption of $20,000 for singles and $40,000 for joint filers upon turning 67. After this age, 20K/40K exemption will apply upon all income, not just on pension.
- Residents born after 1952 will have their entire pension taxed at 4.35% until they reach the age of 67. The rate for all income tax payers drops to 4.25% on Jan 1, 2013. Only after turning 67, they will qualify for the 20K/40K exemption on all type of income, including Social Security.
This bill also gives an option to those born after 1952 to give up their 20K/40K exemption for 100% deduction of Social Security income, upon turning 67. However, according to nation's most powerful senior lobbying agency, AARP (Michigan chapter): revision of pension tax will have an enormous impact on pensioners who depended on the state's "No-Tax" pension status while making their retirement plans. Many seniors protested at the State Capitol throughout last year calling it "unfair to tax retiree's pension just to finance Governor's $1.7 billion business tax cuts".
It is a legitimate assertion, since Crain's Detroit Business report also suggests that this legislation will eliminate the much maligned Michigan's business tax and replace it with 6% corporate income tax. This change means that as many as 90,000 businesses would no longer have to pay Michigan Business Tax, it is a $1.65 billion cut. The difference according to Peter Luke's report in mlive.com "is made up with $1.42 billion in additional income taxes, which includes applying the tax to pensions and other retirement income".
However, Governor Snyder believes that his reforms will create an environment of job growth in the state by inviting more employers. According to him, under old laws, even 55 year old by retiring early were making more income from their "tax free" pensions than they did in their working life. One cannot disagree with Governor's stance as well. Pension tax exemption was costing the state almost $700 million every year, especially since 1994 when it exempted taxes on private retirement income up to $45,120 for single filers and $90,240 on joint, whereas, public pension is tax free since 1967.
While opponents of this new legislation take it as a tax shift rather than reform; supporters including younger generation believe that in order to reinvent Michigan and to lower the debt burden which they did not create, retirees should contribute as well. Where Rick Barczak, a General Motors retiree, considers such move would make Michigan less attractive to retirees, Gov. Snyder remains optimistic that his law will provide an opportunity for a deep pool of Michigan talent to contribute in this great state's economic revival. Nevertheless, debate will not end here. Supporters will find true assessment of this fundamental restructuring in time; in the mean while opponents of this law must propose other remedies for this cash strapped state identified with growing, aging population contributing little to its economic needs.