History of Passage of Michigan’s New Pension Tax With Links to Important Documents
By Mary Pollock, Michigan SERA Legislative Representative
In early February 2011, Governor Rick Snyder announced an overhaul of the Michigan income and business tax in Michigan. The tax reform featured abolishment of the Michigan Business tax, establishment of a flat 6% Corporate Income Tax, and imposition of an income tax on pensions as well as other changes to the individual income tax.
HB 4361 of 2011 amending the Income Tax Act was introduced March 1, 2011. It proposed elimination of all tax exemptions for private and public pensions as well as repealing exemptions for investment income for seniors. The bill also proposed elimination of the senior special exemption of $2,300 and modified the Homestead Property Tax Credit for seniors. Additionally numerous other personal tax credits, exemptions, and deductions were eliminated for all taxpayers. A few weeks later HB 4480 of 2011 was introduced modifying the State Employees’ Retirement Act to be consistent with the changes proposed in HB 4361.
HB 4362 of 2011 proposed replacing the Michigan Business Tax with a flat 6 % Corporate Income Tax. The effect of both bills was to increase individual income taxes by 23% and reduce business taxes by 86%.
According to the Legislature’s fiscal analysis of PA 38, these changes were projected to increase taxes of individuals by $1.4 billion in FY 2012-2013 and decrease business taxes by $1.65 billion in FY 2012-2013.
Michigan SERA Coordinating Council Chair Bob Kopasz, Michigan SERA attorney Dan McLellan, Michigan State Employees’ Retirement System Board Chair Doug Drake, and Michigan SERA Legislative Representative Mary Pollock testified against the tax changes at a hearing of the House Tax Policy Committee on March 16, 2011. Fifteen SERA members visited the House Tax Policy Committee hearing of March 30 and several testified and/or put in cards opposing the pension tax.
Because of the massive negative reaction to the proposed pension tax from seniors and others, an April 12 compromise among the Republican leadership of the House and Senate with the Governor was announced:
Despite the compromise, younger retirees were still negatively affected by the pension tax and SERA continued its opposition. Our analysis indicated that seniors and pensioners would be contributing $528 million of the projected $1.4 billion in increased individual income taxes. Not only would retirees face a pension tax, but removal of the senior $2,300 special exemption, the exemptions for investment income, and changes in the Homestead Property Tax Credit.
SERA representatives again testified against the bill before the Senate Reforms, Restructuring, and Reinventing Committee on May 10, 2011. Thirty SERA members attended the Senate Reforms Committee hearing, submitting cards opposed to the pension tax.
HB 4361 passed both the House and Senate with the bare minimum number of votes and bi-partisan opposition. It was signed into law on May 25, 2011 as PA 38 of 2011. One week later the Governor asked for an advisory opinion concerning the constitutionality of the pension tax from the Michigan Supreme Court pursuant to Article 3, § 8 of the Michigan Constitution. The Governor asked the high court to give its opinion on four questions:
On June 15, 2011, the Michigan Supreme Court granted the Governor’s request for an advisory opinion.
Solicitor General John Bursh from the Office of the Attorney General defended the pension tax and Deputy Solicitor General Eric Restuccia from the Office of the Attorney General argued against its constitutionality. Briefs and reply briefs from all the parties are here.
SERA, AARP, and National Active and Retired Federal Employees represented by Attorney Dan McLellan (former General Counsel for the Michigan Civil Service Commission) filed a joint amicus brief concerning question 1 and 2, arguing that the tax on public pensions was unconstitutional. A summary of our brief was provided at our press conference on August 10. The retiree organizations also filed a reply brief on August 26, 2011.
Others filing briefs opposed to the pension tax were the UAW, AFL-CIO/SEIU-Local 517M, and the MEA. Those filing briefs in support of the pension tax were the Michigan Bankers Association/Michigan Chamber of Commerce/Michigan Retailers Association and Business Leaders for Michigan/Small Business Association of Michigan.
Opponents of PA 38 argued that:
Supporters of PA 38 argued that:
Oral argument was held September 7, 2011 to a packed Michigan Supreme Court. The video of the Michigan Supreme Court hearing can be accessed through the State Bar of Michigan Virtual Court.
On November 18, 2011, in a 4-3 decision along party lines, the Michigan Supreme Court upheld the pension tax on public employee retirees born after 1945 and the age and marital status distinctions but overturned the phase out of the pension tax exemption for higher income taxpayers. The Michigan Supreme Court has provided a summary of the decision in its Syllabus.
The Michigan Department of Treasury has supplied a brief overview of the Income Tax Changes for Retirement Benefits Effective for Tax Year 2012 (for returns filed in 2013) and a general overview of the 2012 Michigan Income Tax Changes.