The election year follies are in full swing in Lansing as Gov. Gretchen Whitmer and Republicans in the Legislature try to outdo each other to see who can offer voters the biggest tax cut.
Whitmer is again proposing the repeal of Michigan’s tax on retirement income, which would reduce state revenues by up to $500 million. Not to be outdone, GOP lawmakers in the House and Senate have started a push for an income tax reduction and a big cut in the corporate tax.
If all of those items pass, it would blow a $2.4 billion hole in the state budget each year.
The Whitmer administration says that the state can afford tax cuts because Michigan generated $5.8 billion more revenue and received nearly $15 billion in federal aid for pandemic relief and infrastructure improvements.
But that windfall is temporary. In contrast, the Legislature is reluctant to repeal any tax cuts once they go into effect. Succumbing to short-sighted views is a way of life in the Capitol.
Which is why the eagerness to dump the pension tax smells of the usual pandering for the senior citizen vote.
Whitmer’s plan would return to the days when Michigan was one of about a dozen states that exempted all retirement income from state taxes, a move that allows the governor’s 2022 re-election campaign to claim that retirees would gain $1,000 a year. Which is nonsense.
The tax, which took effect in 2012, is portrayed as a tax on all pensions. In fact, most retirees pay little or nothing under the new levy.
Current seniors, those born before 1946, are exempt from the tax changes. A second category, born between 1946 and 1952, only pay taxes on the amount of their public or private pension that exceeds $40,000 for a couple, or $20,000 for an individual. In other words, a very small amount.
The rest of us will benefit from the $40,000/$20,000 exemption when we turn 67. That threshold applies to 401(k) withdrawals, IRAs, interest and dividends.
This phased-in, three-tiered system is best understood if you keep in mind that the average private pension falls well below $20,000.
It should also be pointed out that a couple in that 1946-52 sector with a handsome $50,000 pension — beyond any additional tax deductions or credits they can claim — pays less than $35 a month.
In all cases, Social Security income and military pensions are tax- exempt.
The pension tax was sold to lawmakers a decade ago by then-Gov. Rick Snyder as a fairness issue, as it addresses some of the heavier tax burden placed on young workers.
In addition, a “retiree” means many different things in today’s economy, especially in this time of the Covid pandemic.
Why should a couple of spry 68-year-olds who still work, earning $30,000 a year, plus a tax-free pension of $30,000, pay taxes on only half of their income when a couple of 60-year-olds with health problems, limping toward retirement on $30,000 in wages, pay taxes on all of their income?
Under the pension tax plan, the only seniors who would see a notable increase in their retirement income would be those privileged few who are earning nearly six figures or more. Those are the folks truly living out their golden years.