Question about the Pension Taxes on Michigan Residents

[Chicago48]

Would anyone have a link to the pension law that taxes pensions? Is the tax only for State retirees? or ALL retirees living in Michigan?

[mwilbert]

Would anyone have a link to the pension law that taxes pensions? Is the tax only for State retirees? or ALL retirees living in Michigan?

The state doesn't exactly have a law that taxes pensions. It used to have a law that exempted most pension income from income tax. Now it has a law that reduces or eliminates that exemption based upon year of birth and age.

A link to a summary is here: http://www.aarp.org/politics-society...effect-mi.html

[Hermod]

"AARP Michigan continues to oppose the pension tax, largely because it will have a significant impact on pensioners who counted on the no-tax status of pensions when they made their retirement decisions. AARP has sent letters to lawmakers urging them to repeal this unfair tax."


Pensioners moving to North Carolina, Tennessee, Texas, or Florida can continue to receive their Michigan [[or Detroit) pension tax free.

[jiminnm]

Pensioners moving to North Carolina, Tennessee, Texas, or Florida can continue to receive their Michigan [[or Detroit) pension tax free.

As well as Wyoming, South Dakota, Alaska, Washington and Nevada, none of which has a personal income tax, or New Hampshire, Alabama, Mississippi and Pennsylvania, which do not tax pensions or S/S.

[mwilbert]

"AARP Michigan continues to oppose the pension tax, largely because it will have a significant impact on pensioners who counted on the no-tax status of pensions when they made their retirement decisions. AARP has sent letters to lawmakers urging them to repeal this unfair tax."

Pensioners moving to North Carolina, Tennessee, Texas, or Florida can continue to receive their Michigan [[or Detroit) pension tax free.

While I wouldn't want to live in any of those states, there are a couple of states that don't tax income that are reasonably attractive [[and there are also a lot of people who seems to like the named states, misguided as they may be), so as pensioners receiving large enough pensions to bother taxing don't usually put a huge amount of stress on state resources, I thought it was an questionable financial decision on the part of the state to reduce the exemption. It probably increases the net taxes from pensioners, but I wonder if will increase overall tax revenue if it causes a significant number of people to retire elsewhere.

[Cincinnati_Kid]

Most people on THIS forum are in favor of pensions being taxed. They say that they have to pay taxes while working, but totally ignore the fact, one day they'll be retired. That's the first thing Gov "Snydley" did when he got elected. He couldn't wait to inflict pain on pensioners. I think it's a crock for them to be taxed as hard as it already is for seniors to get by. Obviously, the pensioners who are getting 100K a year or more should have to pay the most, but don't penalize the majority who net 20 to 30K annually or less.

[Wesley Mouch]

Would anyone have a link to the pension law that taxes pensions? Is the tax only for State retirees? or ALL retirees living in Michigan?

My understanding is now that the exemption has been repealed, municipal pension income is now no different than my 401k 'pension' income or your wage income. It is now treated just like income -- which of course it is.

I realize that taxes are a burden to the pensioner, but no more so than its a burden to everyone else. Taxing all income including pensions for everyone is simply fair.

Explain this? Why should a Wayne Country retiree making over $100,000 in pension pay no taxes on those earnings? Shouldn't they be paying just like everyone else?

I don't see why an exemption is fair or justified -- espeically in hard times.

[mwilbert]

My understanding is now that the exemption has been repealed, municipal pension income is now no different than my 401k 'pension' income or your wage income. It is now treated just like income -- which of course it is.

I realize that taxes are a burden to the pensioner, but no more so than its a burden to everyone else. Taxing all income including pensions for everyone is simply fair.

Explain this? Why should a Wayne Country retiree making over $100,000 in pension pay no taxes on those earnings? Shouldn't they be paying just like everyone else?

I don't see why an exemption is fair or justified -- espeically in hard times.

Well the logic would be that pensioners provide demand and bring in both pension and Social Security income but don't take up jobs, and don't use schools. Having them is pretty revenue positive even if they don't pay income taxes, so you want as many as possible, so if not taxing them causes more to be around, that will increase revenue.

On the other hand, a lot a pensioners won't change locations just because they have to pay taxes, so you lose money by giving them a tax break. Which one you should do depends on which effect is dominant, which is hard to know without doing some serious analysis. I didn't see that analysis when the state changed the law, but perhaps it was done.

[Mikeg]

.....I didn't see that analysis when the state changed the law, but perhaps it was done.

A simple but seldom mentioned analysis of the changes in pension taxation is that it will reduce retiree's pension/IRA/401[[k) checks by $343 million in 2013 compared to 2011 [source]. In other words, one-third of a billion dollars is being removed annually from Michigan's private economy and transferred to the state so that they can spend it in different and supposedly better ways.

Because of the changes in the tax laws, most Michigan retirees had to increase their withholding beginning in 2012 and unless they had been able to save money in 2011, their discretionary income has been reduced. Evidently our political leadership in Lansing believes that our state's private economy is robust enough to take a third of a billion dollar hit so that the wheels of government can keep spinning merrily along.

[Wesley Mouch]

...On the other hand, a lot a pensioners won't change locations just because they have to pay taxes, so you lose money by giving them a tax break. Which one you should do depends on which effect is dominant, which is hard to know without doing some serious analysis. I didn't see that analysis when the state changed the law, but perhaps it was done.

The assertion that retirees are a benefit to the community is strong. But why single out municipal retirees? If the logic is strong, then we should exempt all retirees. Why would we not want auto company retirees to stay too?

[mwilbert]

As long as the state is spending it, that should offset the loss of private spending. In any case, the net effect would be pretty small. Even if for some inconceivable reason the state didn't spend the money at all, $343 million is only a few hundredths of a percent of the state economy, so in this context it is a rounding error.

[Wesley Mouch]

...In other words, one-third of a billion dollars is being removed annually from Michigan's private economy and transferred to the state so that they can spend it in different and supposedly better ways. ...

Mike, that's true of all state taxation revenue -- isn't it. My last question still stands. So why the benefit for retirees from government and not other retirees. Why are they a favored class? If you want the $343 million to stay in taxpayers hands, why not just reduce all tax rates for all retirees to achieve that savings. Do you think non-government retirees don't deserve the same break? If so, why?

[Mikeg]

As long as the state is spending it, that should offset the loss of private spending. In any case, the net effect would be pretty small. Even if for some inconceivable reason the state didn't spend the money at all, $343 million is only a few hundredths of a percent of the state economy, so in this context it is a rounding error.

The state doesn't spend a single dime at the neighborhood Hallmark shop where my wife used to buy her cards and gifts, nor at the corner grill where I used to stop for breakfast several times each week. I dare you to try using that "rounding error" explanation with a senior citizen on a fixed income who saw their MI income tax bill take a bigger chunk out of their wallet.

[mwilbert]

The state doesn't spend a single dime at the neighborhood Hallmark shop where my wife used to buy her cards and gifts, nor at the corner grill where I used to stop for breakfast several times each week. I dare you to try using that "rounding error" explanation with a senior citizen on a fixed income who saw their MI income tax bill take a bigger chunk out of their wallet.

I did not say it was a rounding error for the retirees, although since it only affects people born after 1946 there weren't too many senior citizens hit yet. It is a significant tax change and as you could see from what I have written on this thread, I'm not sure it was a good idea. However, it is a rounding error for the Michigan economy, which is why concerns about it causing damage to that economy by removing spending power are unfounded.

[Mikeg]

Mike, that's true of all state taxation revenue -- isn't it. My last question still stands. So why the benefit for retirees from government and not other retirees. Why are they a favored class? If you want the $343 million to stay in taxpayers hands, why not just reduce all tax rates for all retirees to achieve that savings. Do you think non-government retirees don't deserve the same break? If so, why?

Government and private pensioners who were younger than 67 in 2012 are now both taxed based on the same set of exemption levels. Only the government pensioners who were 67 and older in 2012 retained their full exemption - unfairly in my opinion, especially for legislation that was touted as supposedly necessary to rectify an unfairness to younger workers.

I'm hard-pressed to think of any MI income tax exemptions like this that are predicated on the taxpayer's date of birth, particularly for something like pension income which in this day and age does not necessarily begin at the same age for everyone. If fairness was truly the name of the game, the change in exemptions would have affected only those who had not yet started collecting pension income so they could make their decision to retire with advance knowledge.

I believe there are more acceptable ways to resolve "unfairness" in the tax code than one chosen which takes more taxes from targeted age groups to fund the high cost of government.

[Wesley Mouch]

I believe there are more acceptable ways to resolve "unfairness" in the tax code than one chosen which takes more taxes from targeted age groups to fund the high cost of government.

Yes. The tax code already exempts [[for all practical purposes) those who don't make much money. At the average income of $19,000 for Detroit GRS retirees, I don't think they'll pay much tax anyway.

I'm OK with the retiree who is getting $100,000 being taxed just like everyone else.

A blanket exemption was unnecessary and just pork of another era.

[Locke09]

Yes. The tax code already exempts [[for all practical purposes) those who don't make much money. At the average income of $19,000 for Detroit GRS retirees, I don't think they'll pay much tax anyway.

I'm OK with the retiree who is getting $100,000 being taxed just like everyone else.

A blanket exemption was unnecessary and just pork of another era.

I would have been ok with all retirees making over a certain amount, regardless of age, paying income tax as well. But in their rush they didn't take time to forge something that would have made more sense and been more fair. Now it is a convoluted age/social security amount/pension amount mess.

A simple formula where the first X dollars is exempt and everything else is taxed would not have caused nearly the stir that was caused. Another alternative that would have been palatable was to exempt those already retired and tax any new retirees.

[Wesley Mouch]

I would have been ok with all retirees making over a certain amount, regardless of age, paying income tax as well. But in their rush they didn't take time to forge something that would have made more sense and been more fair. Now it is a convoluted age/social security amount/pension amount mess.

A simple formula where the first X dollars is exempt and everything else is taxed would not have caused nearly the stir that was caused. Another alternative that would have been palatable was to exempt those already retired and tax any new retirees.

Locke, the tax code is the right tool here. Consider this case: A retiree sets up a successful consulting practice and makes $2 million a year in consulting fees from his cousin Robert who works in government. Why should some of his pension be exempt from income tax?

You need to consider all income -- and that's just what the tax code already does.

[gazhekwe]

Only the government pensioners who were 67 and older in 2012 retained their full exemption


Actually, if filing jointly and one party is 67, even if that person is not the pensioner, then the exemption still applies.

[Locke09]

Consider this case: A retiree sets up a successful consulting practice and makes $2 million a year in consulting fees from his cousin Robert who works in government. Why should some of his pension be exempt from income tax?

As long as he pays taxes on his 2 million, I'm good with him getting an exemption on the first $20,000 of his pension. That is more fair than taxing the people who have already retired and are on a fixed income and had no opportunity to plan ahead for the loss of their exemption. That's where 99% of the people are going to fall, so if 1% gets an extra minor benefit as a result, I think that is fair.

Besides, the tax code doesn't stop him from getting his personal exemptions just because he's making a lot of money. This exemption would be the same. I think the regular tax code isn't the best fit because these people are stuck on a fixed income and we have basically reduced the value of that income forever. so, a non-age-related exemption or grandfathering would have been fair[[er).

[Locke09]

Only the government pensioners who were 67 and older in 2012 retained their full exemption


Actually, if filing jointly and one party is 67, even if that person is not the pensioner, then the exemption still applies.

Yep. Just another piece of convoluted craziness.

[Hermod]

Yep. Just another piece of convoluted craziness.

The end result of using the tax code to advance or inhibit social and economic activities. You end up with a lot of "Catch 22s" in real life.

[Wesley Mouch]

The end result of using the tax code to advance or inhibit social and economic activities. You end up with a lot of "Catch 22s" in real life.

And those Catch 22's only benefit those in power. Redistributionists don't seem to notice that as long as they see some redistribution -- they're happy. But they've been hoodwinked.

[Novine]

"However, it is a rounding error for the Michigan economy, which is why concerns about it causing damage to that economy by removing spending power are unfounded."

Don't look now but the state unemployment rate has ticked up again and the rate of decline stalled in the past year. Is it because of the pension tax? Who knows. But for all of the Governor's "pro-business" actions over the past 3 years, you can't tell it's made much of a difference when comparing Michigan economic improvement with any other similarly situated Midwestern state.

[mwilbert]

Is it because of the pension tax? Who knows

I know. It isn't. Even though I wasn't really in favor of the change, I'm not going to blame it for things it couldn't possibly have caused. I wasn't in favor of any of Snyder's other economic actions that I can think of offhand, although I suppose there might be one. I wasn't a big fan of the movie tax credits, I guess.