The Snyder Budget II: Taxing pensions

In a grim edition of “No Reasonable Reaction Goes Unpunished,” Paula Gardner listed among her “most unproductive reactions to” the Governor’s budget:

The knee-jerk. The fixed-income crowd can always be counted upon for a strong reaction, so anything affecting pensions is going to trumpet panic. Ditto education, public employees, and municipalities… We might still say a cut is unfair. But it needs throughtful vetting.

The seniors among AnnArbor.com’s readership, of course, went berserk.  In return for her sanity, Paula Gardner got read the riot act by about sixty commenters who didn’t like what she had to say about the Governor’s proposal to tax pensions.

Lessenbury reported a typical reaction to the proposal:

“We will be leaving the state as soon as possible if this tax goes into effect,” Lawrence Gibson of Charlotte wrote to me. Well, he will have a very limited choice of locales.

The only other states with income taxes that don’t tax pension income are Alabama, Mississippi and Pennsylvania.

The nonpartisan Center for Michigan asked what seemed, in light of that situation, a reasonable question:

Can Michigan afford to be a state with a tax code that punishes young people while serving as a haven for older people?

And the Center’s founder Phil Power answers that same question in his editorial this week:

The financial stakes are enormous. Administration officials estimate the state take from taxing pensions at $900 million, which goes a long way to plug the hole left by $1.2 billion tax cut for businesses that’s also embedded in the Snyder budget…

Older Michigan residents who are still working are taxed on income from their jobs, while those who have retired and get income from a pension are not.

The Snyder administration maintains that one’s tax liability ought not be determined by whether or not the decide to retire.

Nor do they think people should be penalized for working…  As things now stand, young people who are working and being taxed on their income are, in practice, subsidizing older people whose retirement income is not taxed.

I am sympathetic to the argument that some seniors get by on very meager pensions, and that taxing them might drive them into poverty.  I get that.  Like the proposal to eliminate the state’s Earned Income Tax Credit, this concern fundamentally stems from the fact that Michigan has a flat, not progressive, tax system, and that we need exceptions for people at the very bottom of the income scale.

Oh wait, it turns out we do:

Under five different Treasury Department scenarios… retirees with total pension and other income of $42,000 or less would pay no state income tax under Snyder’s tax plan.

Snyder’s tax plan may be many things, but according to the Treasury Department analysis it is NOT a tax on destitute grandmothers or other retirees with low fixed incomes.

Power, again in his editorial, provides another example:

(A)ccording to an administration analysis, a retired senior couple with household income of $59,000 from pension income and social security, would owe no state income tax. In fact, they’d get a refund check for several hundred dollars from the state.

However, a non-senior working couple with children whose household income is $10,000 less than the seniors would have to pay more than $1,000 in Michigan income tax!

Another fear-driven, fiction-based argument bites the dust.

Let’s set aside the fact that many seniors don’t have any pensions whatsoever, as well as the fact that for most of my generation, myself included, pensions are not even an option since even public employers don’t provide them anymore for new hires.

Let’s also set aside the likelihood that a lot of the retirees complaining are the same ones who elected Republicans to an across the board sweep of state government; the same ones who opposed last year’s federal healthcare reform because they feared it would result in cuts to Medicare;  the same ones who are in a veritable rage over federal spending but, again, don’t want to touch Medicare.

But in general, Michigan’s young people, and indeed anyone still working and paying taxes without the expectation of a pension benefit, owe Governor Snyder a big thanks for taking on the senior lobby on this issue.  It’s a question of simple fairness.

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