Michigan governor, Republican lawmakers announce plan to tax retirees' income up to age 67

4/12/2011

LANSING — Michigan Gov. Rick Snyder announced a new plan Tuesday to tax retirees' income up to age 67.

The Republican governor had wanted to tax all retirement income the same as normal income in a bid to raise $900 million to help pay for a business tax cut, but many lawmakers balked after seniors made their displeasure clear. More than a thousand angry seniors protested at the Capitol a month ago, and many had told lawmakers during a recent legislative recess that the taxes would be a hardship.

Snyder has been working to reach a compromise with top Republican lawmakers, and they joined him at his announcement Tuesday. Although neither Senate Majority Leader Randy Richardville or House Speaker Jase Bolger promised the votes were there for the revised plan, both said it was likely the two chambers' Republican majorities would pass the bills.

Michigan currently exempts all Social Security and public pension benefits from income taxes, as well as up to $45,120 a year for a single return and $90,240 on a joint return in private retirement and pension benefits, a cap that increases annually with inflation. Those are the most generous senior tax breaks in the country, costing the state nearly $1 billion a year in lost revenue.

Under Snyder's plan, anyone born before 1946 — those age 67 and over as of Jan. 1, 2012 — would continue to get those same tax breaks. Those born between the beginning of 1946 and the end of 1952 — retirees aged 60 to 66 as of Jan. 1 — would see some of their retirement income exempted from the tax. The ceiling would be $20,000 for single filers and $40,000 for joint filers and include money from public and private pensions, 401(k)s and IRAs.

Social Security payments would not be taxed. When those in the middle group turn 67, they'll qualify for a senior tax exemption of $20,000 for a single filer and $40,000 for joint filers, regardless of whether the money comes from retirement or from a current job.

Anyone born after 1952 would have all retirement income taxed the same as other income, although Social Security would not be taxed. Michigan's income tax rate currently is 4.35 percent and would drop to 4.25 percent on Jan. 1, 2013, under the tentative agreement. When these filers turn 67, they would qualify for the same senior tax exemption of $20,000 for single filers and $40,000 for joint filers.

"It would create a great transitional plan," said Snyder, who has argued the current tax breaks pushed too much of the tax burden onto younger taxpayers.

Snyder's original plan would have caused retirees to pay about $900 million annually in state income taxes on retirement income that's now exempt. His revised plan would raise a third of that. Michigan would still be in the top 10 nationally as far as tax breaks for seniors.

To fill the gap, he's proposing delaying a small income tax cut for a year, to 2013, saving $170 million; coming up with $150 million more in budget cuts, which have not yet been announced; lowering the eligibility level of the homestead tax credit, a savings of $200 million; and gaining $60 million through technical changes to business taxes.

Democratic legislative leaders have opposed taxing retirement income. They issued a sharply worded response called the revised plan "nothing but a bait-and-switch that offers little relief in exchange for yet another tax increase on residents."

"It does nothing to resolve the concerns and frustrations that have brought people to the Capitol by the thousands in recent weeks to voice their opposition to his agenda," said a statement from Senate Democratic Leader Gretchen Whitmer and House Democratic Leader Richard Hammel.