Capitol News

April 2011

Pension and Senior Tax Proposals — Since Governor Snyder’s tax and budget presentation on February 17, it has been non-stop hearings, information gathering, meetings, phone calls, e-mailing, rallies, and just thinking, thinking, thinking about how to defeat the administration’s plan to tax our pensions and alter other senior exemptions and credits.

In order to pay for a $1.4 billion structural deficit and eliminate the Michigan Business Tax that brings in $1.8 billion, the Governor has proposed significant spending reductions and a comprehensive tax restructuring plan that shifts state tax liability from businesses to individuals. Business tax revenues to the state will be reduced by 86% while individual taxes paid to the state will increase by 32%.

Four Tax Changes Would Affect Most SERA members — The income tax changes proposed by the Governor would increase the income tax by an estimated $804.4 million in FY 2011-12 and $1.67 billion in FY 2012-13. Here are the four proposals affecting pensioners and seniors 65 or better according to the House Fiscal Agency analysis of House Bill 4361:

  1. Eliminating the pension exemption. Under current law, Social Security, military, federal, state and local government pension/retirement income is fully exempt. Private pensions are exempt up to $45,120 single/$90,240 joint (TY 2010)  these levels are indexed to inflation. In Michigan, defined benefit plans, IRAs, and annuities are fully exempt. Also, 401(k) distributions attributable to employer contributions or to employee contributions that are matched by the employer are exempt, but distributions attributable to employee contributions that are not matched by the employer are currently subject to the state income tax, subject to the private pension limits. In addition, 401(k)s with no employer match are not considered pensions and therefore are completely subject to the income tax. The Executive Recommendation would eliminate these exemptions (except for the military and Social Security exemptions).
  2. Eliminate the dividends, interest, and capital gains exemption for seniors. Under current law, the investment income of seniors is exempt from taxation up to $10,058 single/$20,115 joint (Tax Year 2010, indexed to inflation). Governor Snyder’s proposal would eliminate the exemptions entirely and tax this kind of income from the first dollar.
  3. Eliminate the $2,300 special exemptions for seniors an individuals with unemployment compensation equal to or greater than 50% of their AGI (adjusted gross income). Everyone gets a $3,600 exemption and seniors get an extra additional $2,300 exemption (Tax Year 2010, indexed to inflation). The Governor’s proposal eliminates the senior special exemption and the unemployment income exemption.
  4. Homestead Property Tax Credit reduction. For TY 2008, Michigan taxpayers with household income less than $82,650 could claim a property tax credit, and the computed credit is reduced by 10% for every $1,000 that household income exceeds $73,650. Under current law, the credit is equal to 60% of the amount by which property taxes (or 20% of rent for renters) exceed 3.5% of household income, up to a maximum of $1,200. For seniors and disabled filers, the credit is equal to 100% of the difference. The proposed changes would adjust the percentage by which property taxes exceed 3.5% of household income to 80% for all filers except disabled taxpayers, who remain at 100%. In addition, the credit will begin to phase-out at an income level of $60,000.

Other Tax Changes Potentially Affecting All Taxpayers — Other proposed tax changes are:

  • Freeze the income tax rate at 4.25%. Under current law, the income tax rate is 4.35%. Beginning October 1, 2011, the rate will be reduced by 0.1 percentage points each year until the rate reaches 3.95%; then the rate will be reduced to 3.9% effective October 1, 2015.
  • Personal exemption phase-out. Under current law, $3,700 (TY 2011, indexed to inflation) is exempt from AGI for each personal exemption claimed on the federal income tax return. The personal exemption increases in $100 increments based on inflation. The Executive Recommendation would phase-out the personal exemption for single taxpayers between the income range of $75,000 and $100,000 and for married taxpayers between the income range of $150,000 and $200,000. Taxpayers with incomes above the upper bound would receive no personal exemption. The formula for the phasing out of the exemption is:
  • Personal Exemption multiplied by: $100,000 minus total household resources

    $25,000

  • Eliminate child deduction. The child deduction provides a $600 subtraction from AGI for each dependent child age 18 or younger.
  • Eliminate miscellaneous subtractions. The Executive Recommendation would eliminate political contributions; prizes won from bingo, raffle, or charity games; losses from the disposal of property; income from gas and oil royalty interest; certain distributions from IRAs used to pay higher education expenses; qualifying distributions from a pension or retirement plan that is contributed to a charitable organization.
  • Eliminate the city income tax credit. The city income tax credit is a nonrefundable credit to partially offset the city income tax liability (levied in 22 cities). In TY 2008, 823,612 credits were allowed, and the average credit was $38.
  • Eliminate the public contributions credit. The public contributions credit is a nonrefundable credit equal to 50% of the amount contributed up to a maximum credit of $100 for single ($200 for joint) returns. Public contributions include gifts to Michigan colleges and universities, public libraries, museums, and public broadcasting stations. In TY 2008, 273,300 credits were allowed, and the average credit was $90.
  • Eliminate the community foundations credit. The community foundations credit is a non-refundable credit equal to 50% of the amount contributed up to a maximum credit of $100 for single ($200 for joint) returns. In TY 2008, 35,200 credits were allowed, and the average credit was $93.
  • Eliminate the homeless shelter/food bank credit. The homeless shelter/food bank credit is a non-refundable credit equal to 50% of the amount contributed up to a maximum credit of $100 for single ($200 for joint) returns. The credit is for cash donations to qualifying homeless shelters, food banks, and food kitchens whose primary purpose is to provide accommodations or food to indigent persons. In TY 2008, 234,100 credits were allowed, and the average credit was $81.
  • Eliminate the historic preservation credit. The historic preservation credit is a refundable and a non-refundable credit to rehabilitate historic sites and is equal to 25% of the qualified expenditures. In TY 2008, about 300 credits were allowed and the average credit was $4,581.
  • Eliminate the college tuition and fees credit. The college tuition and fees credit is a non-refundable credit for resident taxpayers with AGIs of less than $200,000 and is equal to a percentage of tuition and fees. To qualify, the school must have certified that tuition and fees will not increase by more than the rate of inflation. The amount of the credit is the lesser of 8% of the tuition and fees paid or $375 per student. The credit cannot be claimed for more than 4 years for any one student. In TY 2008, about 83,000 credits were allowed and the average credit was $146.
  • Eliminate the vehicle donation credit. The vehicle donation credit is a nonrefundable credit to equal to 50% of the fair market value of certain automobile donations to qualified charitable organizations. The credit is limited to up to a maximum credit of $100 for single ($200 for joint) returns. In TY 2008, about 2,200 credits were allowed and the average credit was $56.
  • Eliminate the individual or family development credit. Individuals or families whose income is 200% of the federal poverty level can establish accounts for qualified expenses and receive a nonrefundable credit equal to 75% of the contributions made to the account.
  • Eliminate the adoption credit. The adoption credit provides refundable credit of up to $1,200 to the extent that qualified adoption expenses exceed the amount allowed under the federal adoption credit.
  • Eliminate the stillbirth credit. This refundable credit is available to taxpayers who have been provided with a Certificate of Stillbirth. The credit is equal to 4.5% of the personal exemption amount, rounded to the closest $10 increment.
  • Eliminate earned income tax credit. The EITC is a refundable credit for working low income households equal to 20% of the federal EITC. This would increase revenue by an estimated $373.7 million for FY 2012-13. In recent years, a portion of the state earned income tax credit has been used to meet maintenance of effort (MOE) requirements for federal Temporary Assistance for Needy Families (TANF) dollars. Elimination of the credit would also eliminate this TANF MOE claim generated by the state EITC. Thus, other eligible state spending would need to be identified to ensure that MOE requirements were met.
  • Reserve for future tax and fee reform. The Executive Recommendation would set aside a portion of income tax revenue in a Tax and Fee Reform Reserve Fund; the Executive budget has indicated that this is to be used for future tax cuts. This amount would total an estimated $171 million in FY 2012-13, $380 million in FY 2013-14, $593 million in FY 2014-15, and $719 million in FY 2015-16.

The last item, a reserve for future tax and fee reform, is an open-ended fund giving the administration significant unrestricted leeway to give more tax cuts to carry out the Governor’s programs.

Potential Tax Changes under the Executive Recommendation in Detail

Effective January 1, 2012
(Millions of Dollars)

  FY 2011-12 Estimates   FY 2012-13 Estimates
Business Tax Related GF/GP SAF Total   GF/GP SAF Total
Repeal MBT -1,419.80 -750.2 -2,170.00   -1,260.70 -763.7 -2,024.40
Partial Year MBT 900.2 0 900.2   0 0 0
6% Corporate Income Tax (Only C Corps) 460.1 0 460.1   748.8 0 748.8
Financial Institutions Tax 27.7 0 27.7   43.9 0 43.9
Honor Existing Firm-Specific Credits -293 0 -293   -500 0 -500
  Net Business Tax Change -324.8 -750.2 -1,075.00   -968 -763.7 -1,731.70
               
Income Tax Related              
Freeze Income Tax Rate at 4.25% 0 0 0   171 0 171
Eliminate Private Pension Exemption 363.5 95.4 459   553 146.5 699.5
Eliminate Public Pension Exemption 121.6 31.3 153   184.4 48.8 233.2
Retain Military Pension Exemption -12.3 -3.2 -15.4   -19.8 -3.7 -23.5
Eliminate Investment Income Exemption By Seniors 28.1 7.2 35.4   42.9 11 53.9
Eliminate Some Special Exemptions 6.7 2.1 8.8   40.9 0 40.9
Phase-Out Personal Exemption 41.4 13 54.4   63.2 19.7 82.9
Eliminate Child Deduction 0 0 0   57 0 57
Eliminate Miscellaneous Subtractions 28.1 7.2 35.4   42.9 11 53.9
Eliminate Non-refundable Credits              
  City Income Tax Credit 26.3 0 26.3   36.7 0 36.7
  Public Contributions Credit 20.3 0 20.3   28.1 0 28.1
  Community Foundations Credit 3 0 3   4.1 0 4.1
  Homeless Shelter/Food Bank Credit 16.5 0 16.5   22.8 0 22.8
  Historic Preservation Credit 0 0 0   0 0 0
  College Tuition Credit 7.1 0 7.1   9.8 0 9.8
  Vehicle Donation Credit 0.8 0 0.8   1 0 1
  Individual or Family Development Credit 0 0 0   0 0 0
Eliminate Refundable Credits              
  Adoption Credit 0 0 0   1 0 1
  Stillbirth Credit 0 0 0   0 0 0
Eliminate EITC 0 0 0   373.7 0 373.7
Changes to Homestead Property Tax Credits 0 0 0   -7.2 0 -7.2
Eliminate All Voluntary Contributions 0 0 0   0 0 0
Tax and Fee Reform Reserve Fund 0 0 0   -171 0 -171
  Net Income Tax Change 651.2 153.1 804.4   1,434.40 233.4 1,667.80
               
Total Tax Changes 326.5 -597.1 -270.6   446.4 -530.3 -64

Source: Michigan Department of Treasury

The entire House Fiscal Agency analysis of the business and personal income tax changes in HB 4361 and HB 4362 is available at .

Reactions — Taxing pensions alone would contribute $900 million to the $3.2 billion the Governor needs to make his tax and budget plan work. However, the 1.5 million seniors in the state are reliable voters and apparently began contacting their legislators immediately. Senator Jack Brandenburg, Chair of the Senate Finance Committee through which a tax proposal would usually flow, considers it a tax increase and opposes it. He and Senator Rick Jones have asked for an Attorney General Opinion on the legality of it. By February 25, eight Republican Senators reported they disliked the proposal to tax pensions.

The Senate Republicans developed their own proposal and met with the Governor to suggest that the pension tax only apply to future retirees and that the proposed Corporate Income Tax be increased to 6.75% with a 6% tax rate on S-corporations, limited liability corporations, partnerships and other business entities. This would raise $700 million. The other $200 million would be found through additional spending cuts. The Governor apparently indicated he liked his proposal better and intends to stick to it. Lately he has indicated that he thinks his pension tax proposal will pass in some form. The Senate Republicans will introduce their tax proposal in the coming weeks.

EPIC-MRA polling indicated that the Governor’s job approval rating dropped from 59% to 44% a couple weeks after the budget and tax proposals were introduced. EPIC-MRA President Bernie Porn said the question people are asking is simple: "Why cut business taxes that much and have seniors pay for it?" The poll found that 4 in 10 disliked the pension tax proposal and that opinion was true for those above and below age 50.

March 15 “It’s Not Fair” Rally — AARP contacted SERA and other organizations to help plan a rally on the Capitol lawn for March 15 with the theme of “It’s Not Fair.” We gladly accepted and invited our members to attend. The rally attracted 1,500 people from all over the state. I spoke very forcefully that it is both unconstitutional and unfair to tax our state pensions.

SERA Testimony at House Tax Policy Committee

The House Tax Policy Committee began having hearings in early February to educate new Representatives about the tax structure in Michigan and to allow public testimony about proposed changes. The proposed amendments to the income tax act were introduced on March 1 as HB 4361. Later HB 4480 amending the State Employee Retirees’ Act was introduced.

On March 16, SERA presented its testimony opposing those aspects of HB 4361 targeting pensions and seniors. I presented a general overview about the illegality of taxing public pensions, the public policy reasons for longstanding senior tax breaks, the low pensions of state employee retirees, the expenses of seniors, and that promises to current seniors should be kept. SERA Council President Bob Kopasz shared his personal financial story with the Committee. It was the first time the Committee actually heard so directly from an actual pensioner and they were all ears.

Dan McLellan, SERA member, retired former General Counsel for the Michigan Civil Service Commission and former member of the State Employees’ Retirement Board, testified about the legal issues. He stated:

State retirees earned their pensions under (1) a statutory retirement plan that specifically prohibited reducing their retirement benefits by state taxation and (2) a constitution that guaranteed those retirement benefits. Thus, any effort by the legislature to reduce state retiree benefits for current state retirees violates Mich Const, Art 9, 24, whether it is attempted by amending the Income Tax Act or the SERS Act. The legislature may tax state employee pensions, but may do so only prospectively and only for new state employees. The legislature may not reduce current state employee pensions by amending either the Income Tax Act or the SERS Act. If the legislature adopts amendments to tax state employee pensions, we expect the courts to hold that the amendments are unconstitutional.

Doug Drake, SERA member, state employee retiree, Chair of the State Employees’ Retirement System Board, and former manager in the Office of the Budget, testified that:

Balancing the budget on the backs of the poor and the retired in Michigan is bad enough from a policy perspective. It is worse when the reality is that the budget proposes to tax them to finance still more tax relief for Michigan businesses.

SERA Members Turn Out For Hearing — The House Tax Policy Committee Chair announced that hearings on the tax proposal would be ending soon. We therefore called on SERA members to attend the March 30 hearing. Fifteen SERA members attended, wearing prominent big stickers saying “No Pension Tax.” SERA members Duane Hoffman, Mary Ann Watson, and Vergil Pinkney submitted testimony and all submitted cards opposing the pension and senior tax changes.

Administration Defends Pension Tax

On March 23, the administration released a detailed defense of its proposed new tax on pensions and seniors in a presentation to the House Appropriations Committee. Using a fairness theme, the PowerPoint presentation asserted that its proposal treats everyone the same regardless of age or source of personal income, saying it’s all income: $100 from a pension is no different than $100 from a job. It stated that the net effective tax rate for all seniors based on adjusted gross income in 2008 was .48% compared to 2.95% for non-seniors, implying this was unfair. A table compared a retired senior couple and a working non-senior couple, both with incomes of $41,500. The table showed that the seniors had an effective tax rate of 0% while the working couple had an effective tax rate of 2.46% under the Snyder plan.

Unnoticed by the media and others was the fact that the senior couple in the table had a refund of $548 under current tax provisions and would lose that refund under the Snyder proposal; an effective tax increase. Nevertheless, the table was widely quoted to the effect that Snyder’s proposal would not tax pensioners making $41,000 or less and that the Snyder proposal established a $41,500 exemption for pensions and seniors. Even our own members have been affected by the administration’s PR offensive.

While the administration’s example is accurate technically, it fails to make the point that pensions are often fixed and seniors may have no ability to enter the competitive workforce. Someone in the workforce has the potential for yearly raises, bonuses, profit sharing, overtime, longevity payments, or any number of work-based compensation in the future that a senior does not have. Pensioners and seniors have contributed to the state’s revenues for 40 or more years whereas the working person has not. SERA leaders are working on taxpayer examples that will show clearly that pensioners and seniors will lose their refunds and pay higher taxes under the administration’s proposed tax changes.

Other Legislative or Legal Developments

SCR 9, Domestic Partner Benefits — The Senate voted 27-9 to overturn the Civil Service Commission’s approval of health care benefits for domestic partners. The House attempted to reject the benefits but could not muster the two-thirds vote needed to pass SCR 9. Only two Democrats broke with their caucus, but 11 would be needed to gain the necessary 74 votes for a two-thirds majority. The House has until April 18 to take action or the benefits will go into effect. SERA submitted testimony opposing the resolution.

3% Payroll Deduction Developments — Ingham County Circuit Court Judge William Collette ruled in February that the amendment to the State Employee Retirement Act last year requiring active state employees to contribute 3% of their wages to retiree health care costs was unconstitutional. He did so on the basis that it violated Article XI, Section 5 that gives the Civil Service Commission the power to determine classified employees' compensation. "Allowing the legislature to do this would basically allow it to completely usurp the CSC's constitutionally given authority to 'fix rates of compensation,'" Mr. Collette wrote in his ruling, quoting the Constitution. "If Defendant's argument were accepted, any time the legislature needed money to fund current retirees, it could simply confiscate a wage increase granted by the CSC without having the required two-thirds vote of each house constitutionally required." On March 8, 2011, Judge Collette decided the money already collected in an escrow account should be held there until all appeals are final, but that further deductions from pay checks should cease. The administration is appealing the ruling.

Similar legislation requiring public school employees to contribute 3% of their compensation to finance their retirement health care costs is unconstitutional, an Ingham Circuit Judge James Giddings recently ruled, because it seizes the employees' property without exercising due process of law. The decision also enjoined the state from further collecting the 3 percent payments. The state is expected to appeal. Judge Giddings stated the legislative action is “quintessentially arbitrary and unreasonable” because it enacted a law to collect monies from future retirees to help current retirees and the state offers no guarantee that future retirees would receive any of the benefits.

SJR C and SB 7, Legislative Power Grab Over Public Employee Benefits — SJR C proposes to amend the State Constitutional to authorize the Michigan Legislature to establish the cost allocation between a public employer and its employees for health care benefits. A companion bill, SB 7, would require all public employees to pay 20% of the cost of their health care benefits. If the public employer had a health care plan that included a health care savings account in combination with a high deductible health plan, then the employee would only be required to pay 10% of the cost. SERA opposes these bills and has submitted testimony on them.

SERA belongs to a coalition opposing these two measures because this would be a huge cost shift to active public employees. If active public employees are required to pay more for their health insurance, it is likely that pubic employee retirees would be expected to pay a higher premium if not Medicare eligible or to pay an increased premium for a Medigap wrap-around health insurance benefit. To reduce costs, the public employer might even drop certain coverages for retirees. There is no constitutional protection against diminishment of our retiree health care benefit like there is for our pension.

Pension Board Transparency — HB 4156 would require that Detroit pubic pension systems publish and make available to the public on a Web site all expenditures made by the board of a Detroit retirement system on a quarterly basis. Sponsor of the bill, House Oversight Committee Chair Tim McMillin, stated that he wanted to limit the legislation to Detroit because of the public revelations that the Boards spent $380,000 in one year traveling to conferences in Singapore, Hong Kong, Edinburgh, San Diego, San Francisco, Scottsdale, San Antonio, San Juan, Miami Beach, New Orleans and Dubai. The Detroit Free Press had to bring a lawsuit to enforce a Freedom of Information Act request.

SERA testified in favor of the bill if it were expanded to all pension boards. Whereas we don’t suspect the SERB members of any shenanigans, the general principal of transparency is appropriate for all pension board expenditures. And we are interested in more transparency in the reporting from the Investment Advisory Committee handling our pension funds.

At the Governor’s March 21 special message on local government reform, the Governor supported SERA’s position that all public pension boards should be transparent in their operations. He called on the Legislature to support legislation that would implement local pension board best practices saying:

Across the state local pension boards make investment decisions that can total in the hundreds of millions of dollars. Ultimately, the pension payments are a liability of the municipality that agreed to the plan. As such these funds need to be managed responsibly because taxpayer money is at risk  both now and in the future. To protect taxpayer money there are three areas of pension board reform I would ask the legislature to address.

First, local pension boards should be subject to transparency rules. They should be required to report their annual performance and funding level in a standard format. This would allow all plans to be benchmarked against all others. Also, strict restrictions and disclosure requirements should be in place for all board member travel and expenses.

Second, local pension boards should have to meet certain best practice requirements. Modeled after recent Securities and Exchange Commission (SEC) rules, the state should adopt a strict prohibition against the practice known as pay to play.  The SEC regulations that apply to the largest organizations should be applied at all levels  including third-party advisors. If anyone contributes to government officials in a position to influence the decision of a pension board they should be banned from conducting any business with the board for two years. Also, a financial advisor or anyone acting on their behalf should be prohibited from making or soliciting political contributions to a local or state political party where they wish to conduct business.

Finally, local pension boards should be subject to accountability reforms. Boards should be allowed to self-police and act to remove a member. Also, a set of triggers is needed to act as an early detection system for fraud, significant SEC violations or losses. These triggers would allow for state intervention and the possible oversight of a local pension board. Furthermore, board members who are found guilty of a breach of public trust should be required to reimburse the fund for any defense costs that were covered. In the private sector, individuals accused of securities fraud are subject to civil and criminal charges. An executive’s signature on a financial statement implies an individual responsibility for the integrity of the document and that same standard should apply to public pension boards.

The House has referred HB 4156 back to Representative McMillin’s House Oversight Committee and one hearing has been held about how to approach amendments to the bill to cover more entities.

SERA Members Should Take Action

Keep Contacting Your Legislators — Your Legislators need to hear from you about your thoughts on the pension tax and other aspects of the Governor’s proposal. The Governor’s goal is to have the budget done by the end of May, so contacting them earlier has more influence than contacting them later. Legislators’ contact information is in the SERA Directory, or SERA’s Web site at www.mi-sera.org and at the following places:

House members: www.house.michigan.gov/find_a_rep.asp

Senate members: www.senate.michigan.gov/fysenator/fysenator.htm

SERA Resources — The Capitol News page at www.mi-sera.org contains not only this Capitol Report in its longer form and put on the Web site earlier than the monthly Lansing SERA newsletter, but SERA’s legislative docket, a link to the Michigan Legislature Web site where all bills can be found, and Find Your Senator/Find Your Representative links. A new page labeled Testimony contains our testimony at legislative hearings.

I have formed a distribution list for “News of the Day” which is a compilation of media stories about the income tax battle we are experiencing and my own commentary. If you would like to receive this e-mail news, please let me know by e-mailing me at pollockm@comcast.net.

Editor’s note: Mary Pollock is the Lansing SERA Chapter and SERA Council’s Legislative Representative. She may be contacted at 1200 Prescott Drive, East Lansing, MI 48823-2446; Phone 517-351-7292; E-mail michigansera@comcast.net.

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