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The rest of us will pay for pension tax repeal March 6, 2019
Governor Whitmer wants to repeal the pension tax and make up the lost revenue by extending Michigan's 6% corporate tax to S corporations. Currently, only C corporations pay the tax. From Wikipedia:
With an S corporation, profits are taxed as the personal income of shareholders. (S corporations tend to be smaller; they can have no more than 100 shareholders.) From Wikipedia:
In Michigan, income passed through to S corporation shareholders is taxed at 4.25%.
Under Whitmer's plan, S corporation profits will still be passed through to shareholders for taxation but will also be subject to a 6% tax at the corporate level. It has not been said if the pass-through amount will be before or after the 6% corporate tax.
How will S corporations deal with this new 6% tax? My guess is they will attempt to make it up by raising prices. But that will likely result in a drop in sales, requiring staff layoffs. So the result of the new tax will be higher prices and fewer jobs. Indirectly, the tax will be borne by the general population. Is this the price we want to pay to restore an income tax break for a group of people who, on average, are better off than most?
$330 million is the amount of revenue the state will lose in the first year after the pension tax is repealed. It will grow by $15 million each subsequent year. (source: House Fiscal Agency) I have not seen an estimate of revenue from the tax on S corporations.
The pension tax is really the gradual phase-out of an individual income tax exemption. It was passed early in the Snyder administration. Before that, pensions were exempt from the income tax. The new law phased in the elimination of the tax exemption based on retiree age. It applied only to recipients born in or after 1946 - people who are now younger than 74. And it varies according to when you were born and whether you've reached age 67. It is complicated. Details are here on Treasury's website.
The phase-out of the exemption brought an angry outcry from the people affected - about 8% of taxpayers (source) - along with most Democrats, who welcomed an issue with which to bash Governor Snyder. It was accompanied by a reduction in business taxes, allowing opponents to claim that the reduction was financed on the backs of the elderly.
There never was any justification for the exemption. Pensions are income - nothing other than a delayed wage payment - and to be fair, an income tax should tax all income, regardless of source or recipient age. And we should not think of pension recipients as needy or, for that matter, old. Michigan public school employees and Big 3 UAW members can retire at any age with 30 years service. That means that if you started at age 25, you could retire at 55. State employees can retire at 55 with 30 years of service. State police, as well as many local police and firefighters, can retire at any age with 25 years of service, allowing many to retire before age 50.
The notion of older folks being needful of an income tax break is not supported by the data. A 2016 study by the Stanford Center on Longevity concluded that seniors have the greatest financial security of any group surveyed. (source) What is true about them, however, is that they vote.
Send comments, questions, and tips to stevenrharry@gmail.com, or call or text me at 517-505-2696. If you'd like to be notified by email when I post a new story, let me know.
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