March 5, 2023
PHASED-IN RETIREMENT TAX RELIEF ENACTED
Governor Signs Retirement Tax Relief Bill — Governor Gretchen Whitmer signed House Bill (HB) 4001, now Public Act 4 of 2023, on March 7. It will save 500,000 eligible retired taxpayers an average of $1,000 per year.
How It Happened — On January 26, the Michigan Senate adopted in Senate Bill (SB) 1 two of Michigan SERA’s three recommendations for changes in its bill as introduced to address pension tax repeal (no phase-in, index the exemption amounts to the Consumer Price Index). The vote on SB 1 was 23-15, with Sen. John Damoose (R-Harbor Springs), Sen. Mark Huizenga (R-Walker), and Sen. Michael Webber (R-Rochester Hills) voting with all 20 Democrats in support. The bill would have allowed retirees with pension or other retirement benefits to either continue with the Snyder-era taxation formula or revert to the pre-2012 system in tax year 2023. Prior to the changes that began with the 2012 tax year, pensions from public sector jobs were fully exempt from the State income tax regardless of year of birth, and retirement benefits from private sector jobs were subject to a large deduction, $42,240 for singles and $84,480 for those filing jointly, with those deduction amounts adjusting for inflation each year.
On the same day, the Democratic House majority decided to discharge from committee its own similar bill, HB 4001 with a retirement tax relief phase-in, and passed it without a hearing. Because of the differences in the two bills, they were sent to Conference Committee with bi-partisan representation from each chamber.
On February 3, the Governor and Democratic legislative leaders announced that HB 4001 would be used as a vehicle bill for the Lowering MI Costs Plan. It combined phased-in retirement tax relief, a boost to the Earned Income Tax Credit (EITC) from 6 percent to 30 percent of the federal EITC, a new $180 inflation-relief tax rebate for every tax filer if the bill was adopted before April 18, 2023, and an earmark of Corporate Income Tax revenue to the Strategic Outreach and Attraction Reserve (SOAR) Fund. The hope was that combining some popular bi-partisan measures (pension tax relief and a boost to EITC) with more controversial items would make it difficult for Republicans to vote no on the overall package.
Immediate Effect Denied — This newly configured HB 4001 passed the House amid energetic Republican objections and the usual fast-gavel oral vote on a motion for Immediate Effect (IE). The Senate passed the measure on February 16. However, IE was not approved in the Senate where a roll-call vote may be requested. Twenty-six votes in the Senate - all 20 Democrats and six Republican votes are needed for IE. Without IE, the bill will not go into effect until 90 days after the end of the legislative session, usually in late December. That will mean no retirement tax relief and no increased EITC until 2024 for tax year 2023. The $180 inflation relief tax rebates for all tax filers were nixed because of no IE in the Senate.
At issue for Republican support was whether the Governor and legislative majorities in this or other bills would avoid triggering a Republican enacted 2015 law during the Snyder administration requiring an overall income tax cut using a formula involving the inflation rate and State revenues that is estimated to take Michigan’s 4.25 percent state income tax rate to 4.05 percent. Given HB 4001 as adopted would cost the state $800 million to enact the $180 rebates, and $700 million immediately transferred to SOAR, Republicans saw this as a potential end run around triggering the 2015 law for an income tax rate rollback. Republicans favor an overall tax cut for all taxpayers regardless of income rather than the targeted tax cuts aimed at retirees and working low-income wage earners the Democrats favor in HB 4001.
Republican leaders in the House and Senate said if the EITC or the retirement tax were passed as standalone bills, GOP members would have supported them. Senator Kristen McDonald Rivet (D-Bay City), sponsor of the stand-alone EITC enhancement bill, has already introduced an EITC expansion bill with IE and SERA has asked the sponsor of SB 1, Senator Kevin Hertel, to do the same.
The Governor’s press release on March 1 stated HB 4001 was “a $1 billion tax break to eligible seniors and working families. The plan will roll back the retirement tax to save 500,000 eligible households an average of $1,000 a year and quintuple the Working Families Tax Credit to put an average refund of $3,150 back into the pockets of 700,000 Michiganders.” There was no mention of the $180 rebate in the press release.
How Phase-In Works — For tax year 2022 (January 1, 2022 — December 31, 2022; due April 18, 2023), retirees must calculate their allowable retirement subtraction using the Tier structure calculation method adopted in the tax overhaul of 2012.
For tax year 2023 (January 1, 2023 — December 31, 2023; due April 2024) and beyond, retirees have the option to choose the best taxing situation for their retirement benefit by opting into any one of the following calculation methods each year:
Retirees may need to consult the advice of a qualified tax preparer to ensure you are able to deduct the maximum amount of retirement benefits.
A detailed explanations of how the retirement tax relief will work is available at www.michigan.gov/taxes/iit/retirement-and-pension-benefits
Costs to State Revenue — The phase-in of the exemption against retirement income — as well as changes to how police and fire retirement benefits are treated — are estimated to cost the State about $58 million in the first year of implementation. That would jump to $233 million in the second year, $408 million in the third year and about $515 million in the fourth year. Fiscal estimates indicate the costs would be expected to grow over time as new retirees become eligible and distributions from retirement accounts increase.
FISCAL YEAR 2024 EXECUTIVE BUDGET PRESENTATION
The annual budget process formally began February 8 when Governor Gretchen Whitmer presented her proposed budget before the Joint Senate and House Appropriations Committees. The budget recommendation totals $79 billion and includes a General Fund total of $14.8 billion and a School Aid Fund total of $19 billion. The remainder — $45.2 billion — is restricted federal funding revenue.
The Governor divided her proposed budget into these themes:
Appropriations Subcommittees will spend the next several months pouring over proposed departmental budgets and hearing from witnesses about the proposals. The target for passage of a complete budget is in June so that municipalities and schools whose budget year starts July 1 can know how much State revenue they will receive. The State’s budget year starts October 1. An excellent overview of the proposed budget via slide presentation is available at www.michigan.gov/budget.
Abortion Ban Repeal — By a vote of 58-50, the Michigan House on March 1 passed HBs 4006 (S-1) and 4032 to repeal Michigan’s 1931 abortion ban. Two Republicans, Rep. Thomas Kuhn (R-Troy) and Rep. Donni Steele (R-Orion Township) voted with all 56 Democrats. Although both Republicans were endorsed by Right To Life of Michigan, Proposal 3 of 2022 amending Michigan’s Constitution to ensure reproductive rights passed in both of their districts. HB 4006 repeals the section of Michigan law that subjects anyone who administers an abortion to a felony and HB 4032 accordingly amends the State’s Code of Criminal Procedure. Prior to the vote on the House floor, Republican members unsuccessfully offered the same 15 amendments put forward during the House Judiciary Committee hearing on the bills the day before.
The Senate Health Policy Committee reported similar bills on March 2, along with legislation dealing with contraception and medication abortion. The bills are SBs 2, 37, 38, 39, and 93.
Firearms Bills — The Senate Committee on Civil Rights, Judiciary, and Public Safety on March 2 heard three hours of impassioned testimony on the Democrats’ 11-bill package of gun safety legislation. The bills would implement universal background checks, a requirement for safe storage of firearms to help prevent firearms from falling into the hands of children, and extreme risk protection orders that would allow someone to petition a judge to have a person’s firearms confiscated, at least temporarily, if that person is a danger to themselves or others. Survivors of the mass shooting on February 13 at Michigan State University that left three dead and five injured told committee members of their experiences, as did survivors of the 2021 Oxford High School shooting that left four dead and several injured. The bills are SBs 76 - 86.
Similarly, the House Judiciary Committee heard two hours of testimony on March 1 about its version of similar bills — HBs 4138 through 4148.
Earlier on February 27, the Michigan State Capitol Commission voted 5-0 to develop plans for enhanced security measures, including a firearms ban in and around the Capitol grounds.
The Michigan affiliate of the National Association for Gun Rights recently promised to work with local political activists to recall any politicians who vote for gun control legislation.
Election Bills — On February 28, the House Elections Committee heard testimony on two bills to prevent firearms in polling places (HB 4127) and within 100 feet of an absentee ballot counting board while ballots are being counted (HB 4128). No vote was taken. Substitute bills and passage are expected.
LGBT Rights Bill Advances — The Michigan Senate has passed SB 4 to expand Michigan’s civil rights law to include protections against discrimination on the basis of sexual orientation or gender identity or expression in employment, housing, education, public service, or public accommodations. The bill was first introduced 50 years ago. SB 4 passed the Senate 23-15 with three Republicans joining all 20 Democrats in support: Sen. Joseph Bellino of Monroe, Sen. Ruth Johnson of Groveland Township, and Sen. Michael Webber of Rochester Hills. Republicans introduced three unsuccessful amendments to the bill seeking to include protections for persons with strongly held religious beliefs.
Michigan Investment Board Appointments — Governor Whitmer announced the appointment of Denise Ilitch, owner of Ilitch Family Companies and a member of the University of Michigan Board of Regents, and Reginald Sanders, managing director of investments at the W.K. Kellogg Foundation, to the State of Michigan Investment Board. The Board is the investment fiduciary with respect to the investment and management of the assets of the retirement funds that comprise the State of Michigan Retirement System.
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