Michigan Retirees Say ‘Ridiculous’ Retirement Tax Should Be Eliminated

Michigan retirees are optimistic about proposals to eliminate the state tax on retirement income.

Gov. Gretchen Whitmer is supporting legislation that would eliminate the state's so-called "pension tax" of 4.25%, enacted in 2011 under Gov. Rick Snyder to help fill a $930 million budget shortfall created by other state cuts.

The proposal would put, on average, $1,000 per year back in the pockets of 500,000 Michigan households by exempting public pensions and restoring deductions for private retirement income, including private-sector pensions, withdrawals from individual retirement accounts (IRAs), and the portion of a 401k account that is subject to an employer match.

With Michigan sitting on an over $7 billion surplus after receiving billions in pandemic relief from the federal government, Whitmer and legislative leaders are aware that now is the time to negotiate proposals to eliminate the tax on retirement income.

"In May of 2020, we were projecting a $3 billion deficit," Gov. Whitmer told The Oakland Press. "Today, we have a $7 billion surplus. Some of this is one-time money and some of it is ongoing money. We have to be smart about how we utilize it. This is an opportunity for us to right a wrong that has been on the books for 10 years to give seniors some breathing room."

She said inflation has made things difficult for Michigan pensioners who are on a limited and fixed income, adding "we can afford to do it now and I think giving seniors relief should be our top priority right now."

According to the Senate Fiscal Agency, the governor's proposal, to be phased-in over four years, would have an estimated $495 million General Fund budget impact by the end of 2025.

Since 2012, the tax on Michigan pension income received across the state's 147 state- and locally-administered public pension systems has added up to more than $5 billion, according to the Michigan State Employee Retirees Association.

About the proposal and reaction to it

Beginning this year, under the governor's proposal, Michigan pensioners age 65 and over born before 1958 would be able to claim 25% of their retirement income as tax-exempt.

In 2023, those 62 and older born before 1962 would be able to claim 50% of their pension income as tax-exempt and in 2024 those age 59 and older born before 1966 would be able to claim 75% of their pension income as tax-exempt.

In tax year 2025, all Michiganders with pension income, no matter their age or date of birth, would be able to claim 100% of that income as tax-exempt.

Bill King, 69, of Oxford, said he supports the elimination of the state's tax on pensions because he, like many of retired colleagues, don't have the opportunity or means to recoup any of that taxed income through a cost of living adjustment.

King, former chairman of UAW Local 594, which represents workers at General Motors' Truck assembly plant in Pontiac, retired in 2002 after 31 years.

For him, $1,000 back in his pocket would help pay for a lot of medical expenses and other critical day-to-day expenses.

"It's been 10 years since (the State of Michigan) has lived on the backs of retirees for the state budget," he said. "We thought that was wrong at the time and we still think that's wrong because retirees are primarily on a fixed income. That's quite a bit of money that's lost, especially for the younger retirees.

The longtime union worker sees repealing the state's tax on pension income as a voting issue and one that is advantageous for both Republicans and Democrats to take action on. Although he supports the governor's proposal in general, he doesn't agree with the phased-in approach, calling it "ridiculous" and that the tax should be eliminated immediately.

He said that his other retired union colleagues are all in favor of eliminating this tax because it's money being taken out of their pockets for the state's financial gain, when it's the retirees that need it the most.

"A lot of your retirees take on second jobs because they have to and some of what triggered that was the extra tax they are paying," he said. "I myself took on a second job and ended up paying the tax all over again as a retiree because once you go over a certain limit you pay even more."

Alan C. Young, managing director of Detroit-based Alan C. Young and Associates, said the impact of repealing the pension tax is important if you want to make Michigan a destination state.

His firm is one of the largest certified public accountant firms in Michigan that works with hundreds of retirees in Michigan and across the country.

"When you have a situation where you're taxing pension income in Michigan, but not in other states, that becomes an issue that needs to figure itself out," he said. "It's important if you want to make Michigan a destination state for retirees. I'm all for putting money back in the pockets of retirees. You're taxing them from birth to death and that's not how we want to handle our seniors."

In the 2019 tax, a total of 1,074,890 state individual income tax returns had $24.9 million worth of taxable pensions and annuities, according to Internal Revenue Service (IRS) data.

A majority of those pensioners reported total adjusted income of between $25,000 to $50,000. That year, a total of 1.3 million state income tax filers were age 60 and older, according to IRS data.

Young said he supports the proposal, but added there needs to be a long-term budget strategy to make sure this proposed tax cut, and the state revenue lost as a result, can be sustained even without a surplus of federal dollars.

"What's also important is how have their fixed costs risen due to inflation?," asked Young. "They are losing money and if they can get a break wherever they can, including with the pensions, it's a start. We need to try to give relief to our seniors. The timing is an important factor here…this law is unfair."

Jim Pearson, 73, of Highland, taught 33 years in the Huron Valley Schools District. He is supportive of the proposal as are his colleagues in the Michigan education system, calling it a "step in the right direction that we must take."

"I put in the time and did the best job I could for 40 years," he said. "My biggest single disappointment was that just as I'm about to retire, the terms changed. I accepted a lower than par pay for the security of having a pension that was not only not taxed, but something I could count on."

Pearson, who also serves as a Michigan Public School Employee' Retirement System board member, retired one year before the state tax on pensions was put into place.

"I was really shocked when the tax on pensions was signed into law," he said. "I was upset that after 40 years of teaching I was going to get taxed on my pension, which has been seriously eroded since I retired."

About the tax

For decades, Michiganders with pension income were not taxed on that limited income, which averages about $24,609 per year.

That all changed in 2011 leaving many Michigan retirees feeling blindsided and short changed having worked most of their lives only to have their pension income taxed.

Before February 2011, Michigan was one of 14 states that did not tax retirees on their pensions. The state's pension tax was part of a major rewrite of Michigan's state tax code under Gov. Snyder. The rewrite also replaced the Michigan Business Tax with the 6% Corporate Income Tax and reduced various credits.

Currently, pension income is taxed in a three-tier system, depending on the taxpayer's date of birth including:

* Michigan retirees born before 1946, about ⅔ of all Michigan pensioners, are unaffected and whose public pensions are fully tax-exempt.

* Retirees born between 1946 and 1952 can deduct the first $20,000 of pension income for single taxpayers and $40,000 for married couples filing jointly prior to age 67. When they turn 67, they are able to claim those same exemptions against all income, regardless of the source.

* Michigan retirees born in 1953 or after, cannot deduct any retirement income until they turn 67 when they can also claim more limited $20,000- and $40,000-income tax exemptions.

In June 2011, one week after the legislation was signed into law, Snyder asked for an advisory opinion concerning the constitutionality of the pension tax from the Michigan Supreme Court.

That November, in a 4-3 decision along party lines, the Michigan Supreme Court upheld the pension tax on public employee retirees born after 1945.

Even though the new law softened the impact on those born before 1946, younger seniors and pensioners were estimated by the Michigan House and Senate Fiscal Agencies to have paid $528 million more in state taxes for Tax Year 2012 alone.

In Oakland County, a total of 139,404 households receive retirement income averaging $27,865 annually, according to 2019 U.S. Census Bureau data, the most recent data available.

A total of 102,234 Macomb County households receive an average of $21,982 in retirement income per year while 184,844 Wayne County households receive an average of $23,897 in retirement income per year.

In mid-Michigan, there are 5,371 Isabella County households that receive, on average, $20,652 in retirement income per year.

Proposed legislation

Over the past year, eight pieces of legislation have been introduced in the State Senate and House that propose, in some form, repealing the state's tax on pension income.

This week, while speaking to a group of retirees in Detroit, Whitmer told The Oakland Press that it's important the state has tax policy that is fair and that doesn't put an undue burden on Michigan seniors.

Whitmer said any legislative efforts towards phasing out the tax on pension income she views as positive, adding she's eager to have negotiations with legislative leaders and get moving down that path.

"Obviously, the legislature is one leg of the stool and getting my signature is another," she said.

Earlier this month, State Rep. Pat Outman (R- Six Lakes) introduced House Bill 5770 that aims to repeal the state's tax on pension income. Under his bill, Michigan seniors would no longer pay state taxes on retirement income they have earned or saved beginning Jan. 1, 2023.

"With many seniors and retirees living on a fixed income, this bill would give them more flexibility in their budgets and more money in their pockets to live more comfortably during their golden years," he said in a statement.

In January 2021, Sen. Tom Barrett (R-Clarklake) introduced Senate Bill 24 which also aims to repeal the state's so-called pension tax.

Following the governor's State of the State Address Jan. 26, in which she said eliminating the tax on pension income was one of her top policy priorities for 2022, Barret said he appreciated the governor's bipartisan support to provide Michigan seniors with this overdue tax relief.

"This legislation can make an enormous difference for our seniors," he said. Barrett, R-Charlotte. "It is unfair to those on a fixed income to bear this additional burden of taxation on previously earned benefits."

Sen. Paul Wojno (D-Center Line) has also introduced legislation, Senate Bill 0002, to repeal the tax.

On Thursday, the House Appropriations and Tax Policy Committees approved House Bill 5054, which provides a total of $1.5 billion in one-time tax relief to reduce debt and improve the finances of public employee retirement systems.

Most of the funding would go to pension plans for local governments and road commissions, with an additional $350 million to improve financing in the Michigan State Police retirement system.