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):

The favorable treatment of pension income and interest, dividend and capital gains results in filers with similar income facing significantly different tax burden, with younger filers shouldering a heavier tax burden than older filers.

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:

$56,097	adjusted gross income from federal return
-9,500	two regular exemptions @ $3,600 plus $2,300 for one senior (me)
46,597
x .0435	the tax rate for 2010
2,027
-691	property tax credit
$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:

Senior citizens are enjoying some of the biggest income gains in decades at a time when every other age group is losing ground in the recession, the Census Bureau reported Thursday. The 31 million households headed by people 65 and older saw their median income rise by a healthy 5.8% in 2009 after inflation and 7.1% since the recession began in December 2007. Every other age group has suffered income losses of at least 4% during the recession, the data show. Seniors got a lift last year from a $250-per-person Social Security bonus included in the federal stimulus program. That helped boost income more than any year since 1973 and led to seniors out-earning 15-to-24-year-olds for the first time.

"Retired folks are sheltered from big swings in the labor market," says Heidi Shierholz, economist at the liberal Economic Policy Institute. Deflation also helped because Social Security checks didn't decline even though prices did, she says. By contrast, the median income of working-age households has tumbled 4.6% in the recession.

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:

Dear Representative Gilbert,

I have a suggestion that will make House Bill 4361 more acceptable to people concerned about taxing seniors. It is a simple change that will make sure no household with income below the poverty level is taxed. 

The poverty guidelines calculated by the U.S. Department of Health and Human Service are at this site: http://aspe.hhs.gov/poverty/10poverty.shtml. Here they are, compared with the $3700 per person personal exemption totals in House Bill 4361:
 

Family Size	Poverty Guidelines	$3700 per Person
1	$10,830	3,700
2	14,570	7,400
3	18,310	11,100
4	22,050	14,800
5	25,790	18,500
6	29,530	22,200
7	33,270	25,900
8	37,010	29,600
+1	+3740	+3,700

As you can see, the income protected by the $3700 per person exemption is way below the poverty level. No one with income below the poverty level should be expected to pay income taxes. This could be fixed by allowing each household a $7500 exemption in addition to the $3700 per person:
 

Family Size	Poverty Guidelines	$3700 pp +$7500
1	$10,830	11,200
2	14,570	14,900
3	18,310	18,600
4	22,050	22,300
5	25,790	26,000
6	29,530	29,700
7	33,270	33,400
8	37,010	37,100
+1	+3740	+3,700

Consideration should also be given to a deduction for out-of-pocket medical expenses.

These measures would, of course, reduce revenue from the tax. That could be made up by increasing the rate.