Public Policy
  Analysis, opinion & ideas from Steve Harry

Directory

About/Contact

I saved Michigan $320 $500 million a year (about $4.7 billion so far)

May 30, 2020; updated December 30, 2022 with figures from Treasury's tax analysis for tax year 2020

You can thank me for the pension tax, which according to this article in the Detroit Free Press, is bringing in $320 million in revenue.

Actually, I wasn't the first to think the exemption was unfair. Paul Roney of East Lansing, former market specialist for the Lansing Area Chamber of Commerce, was questioning the exemption way back in 1992. That was the year of Lansing's scandalous "early retirement", when 144 city employees - including the mayor, city clerk, finance director and budget director - took a bonus to retire early. Here is his December 20, 1992 letter in the Lansing State Journal:

I wasn't really aware of the exemption until after I retired in 2002 and started receiving a state employee pension. In November of 2007, I sent a Freedom of Information Act request to the Department of Treasury asking for a breakdown by item of total "subtractions from income," the section of the income tax return where pension income was reported. They said they didn't have it. I then wrote to then-Treasury Director Robert Kleine asking why in the world they did not have those figures. I said

 

In early November, I sent you a Freedom of Information request asking for the totals for all returns of each of the “subtractions from income”, lines 8-19 of Schedule 1 of MI-1040. I asked for the figures for tax year 2006 or the most recent year for which complete figures are available. A copy of the response from Carla Robert is enclosed.    I find it hard to believe that Treasury does not have these figures, although the fact that they don’t exist in your report on Tax Credits, Deductions and Exemptions certainly seems to support that fact. It just seems strange that you would collect that information on the MI-1040 and then not compile it.   If you don’t have the figures, I would hope that you would make the system changes necessary to get them. The information is very helpful to policy makers and citizens like me who are interested making our tax system fair and efficient.   Also missing from the Tax Credits, Deductions and Exemptions report on your website was a breakdown of the revenue loss from special exemptions. I would like to know the number of senior and disabled exemptions and the revenue loss from each.

The reply came from Jeff Guilfoyle, Director of the Office of Revenue and Tax Analysis. He said

His entire letter is here.

In 2008, when I ran against incumbent Joan Bauer in the Democratic primary for state representative, I proposed eliminating the pension exemption in my campaign flyer. I said

In January 2009, Paul Roney again wrote the Lansing State Journal:

In April 2009, I paid my tax preparer to calculate the figures for a letter to the Lansing State Journal in which I compared my own tax situation to that of a fictional single woman with two children whose only income was from her $15 per hour job. She paid state and City of Lansing taxes totaling $630 while my wife and I - comfortably retired with an income of $51,098 - paid no state and city tax at all. The state paid us $900.

It was the above letter that could have inspired newly-elected Governor Rick Snyder's proposal to replace the awful Michigan Business Tax with a 6% corporate income tax and finance the change by phasing out the pension exemption. I say that because of this passage from a February 17, 2011 Snyder position paper on Reforming Michigan's Tax Structure:

 

Michigan’s pension exemption and other tax preferences targeted towards seniors result in an extremely inequitable tax burden distribution across senior and non-senior taxpayers. An example from actual tax return data highlights this problem. Currently a senior couple with household income of $59,000, made up mainly of pension income and social security, could have no tax liability and actually receive a check of several hundred dollars back from the state. At the same time, a non-senior working couple with children, whose household income is $10,000 less, could have to pay over one thousand dollars in Michigan income tax.

There was also this from Doug Rothwell, president and CEO of Business Leaders for Michigan, in a March 20, 2011 article in the Lansing State Journal. He said

There you go. That's all the evidence I have. I am trying to get through to Rick Snyder himself so I can ask him where he got the idea. No progress there yet. I also asked Treasury for "figures by tax year, from 2012 to the present, for the increase in individual income tax revenue resulting from the phase out of the exemption for pension income." In a May 21 response, I was told

So I did a little research on my own. Each year, Treasury's Office of Revenue and Tax Analysis does a report on Michigan's Individual Income Tax. The reports are always a few years behind to allow all the returns to be processed, refunds made, etc. The latest is for 2020. You can see that report here. Links to reports for previous years are here. One of the items reported each year is subtractions from federal adjusted gross income (AGI), and among the categories is Retirement/Pension Included in MI-1040 (excerpt below).

The figure I am interested in is the Retirement/Pension total, which for 2019 (above) was $13,747,800,000. I also got that figure for the reports for 2011-2019. 2011 was the year before the pension tax kicked in. I also got the tax rate for those years. Multiplying the retirement/pension subtraction total by the tax rate should roughly provide the revenue loss:

What this appears to show is that the revenue gain from the pension tax in 2020 was about $418,280,500 - the difference between the revenue loss for 2020 and the revenue loss from 2011.

Legislative changes to the income tax since 2011 have reduced the expected revenue gain from the pension tax. Pensions from service in the Michigan National Guard were made exempt effective for the 2012 tax year. Effective for the 2013 tax year, the exemption amount for retirees born between 1946 and 1952 was increased for those whose employment was not covered by the Social Security Act (some police and firefighters). And in 2017, that enhanced exemption for retirees not covered by Social Security was extended to those born after 1952, provided they retired as of January 1, 2013. See Subsequent legislation ruins Michigan's pension tax.

The table below shows the trend. The middle column is the revenue loss from the above table. The column on the right is the 2011 loss minus the current year loss, or the revenue increase from the pension tax. It peaked in 2014 and has gone down each year since.

So it is right around $500,000 a year, but going down. My calculation is supported by Governor Whitmer herself. In her 1/26/2022 State of the State address, she said that repealing the pension tax would mean an extra $1,000 on average for 500,000 Michiganders.

To the $3,904,490,000 total, add an estimated $400,000,000 each for 2021 and 2022 and you have a total revenue gain of $4,704,490,000. So far.

Send comments, questions, and tips to stevenrharry@gmail.com or call or text me at 517-730-2638. If you'd like to be notified by email when I post a new story, let me know.

Previous stories