I can't stand it.
I've been arguing for years that the state is letting seniors and younger pension recipients off easy by not taxing pensions, social security and investment income. It was actually part of my platform when I ran for state representative in 2008. So I was pleased when Governor Snyder proposed ending the tax breaks for all but social security. But because a bunch of seniors made it clear that they don't want to pay taxes (big surprise) and because Democrats used the issue to beat up on the Governor - even if they personally believed there was no justification for special treatment of retirement income - he backed off.
As I understand the new plan, those of us who will be 67 or older by January 1, 2012 will continue to receive the current tax breaks. No tax on pensions, social security and - within limits - interest, dividends and capital gains. We won't, however, be getting special treatment in regard to the homestead exemption.
Younger folks won't fare so well when they reach retirement age. There is an explanation of the changes on Treasury's website.
The problem with protecting retirement income from the state income tax is that it shifts the burden to younger taxpayers. As the Department of Treasury puts it in its analysis of 2008 income taxes (page 19):
No justification. There is no reason for seniors to get a break on their state income tax. They are no worse off financially than other age groups. Of all the 2008 federal income tax returns from Michigan residents that reported Social Security benefits, 50.2% had adjusted gross income (AGI) over $50,000 (source: IRS report), and when income includes Social Security and/or pensions, the gross is likely to be more than AGI. Seniors are also more likely to have medical insurance, either with their pensions or with Medicare. Anyway, an income tax by definition considers ability to pay: seniors with low incomes would pay little or no tax, just like anyone else with low incomes.
My wife and I are retired and our only income is from Social Security, pensions and interest. These are our figures for the 2010 tax year:
Our federal tax for 2010 was $4604. Our state tax was zero. Actually, we got a $691 “refund”, which was our homestead property tax credit. Although our gross income was $70,083, the state paid us. Had our pensions and Social Security been taxable to the extent they are for the federal tax, our state tax would have been $1,336:
There is no reason for pensions to be exempt. They are a form of wages - a delayed payment of wages. Part of the pension comes from contributions made to the pension fund by the employee, and if those contributions were made from after-tax wages, that part should not be taxed again. The “taxable amount” is the part that has never been taxed.
And many pension recipients are not actually seniors. UAW members working for GM, Ford or Chrysler can retire with full pensions after 30 years on the job, as young as 50. Same goes for public school employees. State police can retire at any age after 25 years of service. Other state employees can retire at 55 with 30 years of service.
Finally, don't feel sorry for us seniors because we are on a "fixed income". First of all, being able to count on that check coming every month for the rest of your life without having to do anything (further) to earn it is really delightful. Secondly, our income is not "fixed". Social security benefits increase annually to keep up with the cost of living. State and public school employee pensions increase by 3% each year regardless of the cost of living. The increase is not compounded, but does accumulate. For state retirees, the increase is limited to $300 a year.
The following is from a story that appeared in USA Today on 9/17/2010:
Protecting the lowest incomes. There was one big flaw in the old income tax law that is not addressed in new one. I offered a solution in a letter emailed to Representative Jud Gilbert, sponsor of the original bill, on April 4, 2011: