Lansing— The Michigan Supreme Court cleared the way Friday for Gov. Rick Snyder to tax public pensions, but struck down a portion that would have meant a larger tax on wealthy retirees because it creates an illegal graduated income tax.
The 4-3 ruling is a victory for Snyder, but means his administration will have to plug a $60 million hole in anticipated revenues from the tax. The bulk of his controversial tax change will roll out Jan. 1.
The plan increased taxes on private pensions and removed an income tax exemption on the pensions of public employees as a way to shore up Michigan's budget. Snyder was counting on the tax generating an estimated $230 million in 2012 and $343 million in 2013, but that will be reduced because the court struck down exemptions based on "total household resources."
Snyder said in a statement he was pleased with the overall ruling and it will "help get Michigan's fiscal house in order and economy back on track.
"It will provide for the long-term structural stability of the state's budget while minimizing the impact on current retirees and seniors," the Republican governor said.
Under the measure fought by state retirees, pensions would be taxed as income, or at the state's flat 4.35 percent on federal adjusted gross income, after a basic personal exemption and other possible adjustments.
Extending the tax to public pensions prompted protests at the state Capitol earlier this year. The Legislature approved the tax as part of the budget that also cut $1.8 billion in business taxes through the elimination of the Michigan Business Tax. The Snyder administration asked the Supreme Court to rule on its constitutionality before the tax goes into effect.
Dan McLellan, an attorney for state retirees who fought the plan, said he will recommend appealing the decision to federal court, but didn't say how soon that would happen.
"No doubt about it, retirees got screwed," he said. "You work through your career with the expectation your pension will be tax free. Then these people say, 'Nah, never mind.'"
Chief Justice Robert Young and justices Stephen Markman, Mary Beth Kelly and Brian Zahra found the Michigan Constitution of 1963 requires "public pensions must be treated as contractual obligations that, once earned, cannot be diminished; however, it says nothing about whether these pensions can be taxed." The Republican-nominated majority also found exemptions based on age were not illegal. Under the tax, retirees born before 1946 would continue to get tax-exempt pensions, but younger retirees would have their pensions taxed, depending on their age.
Ari Adler, a spokesman for House Majority Leader Jase Bolger, R-Marshall, said late Friday his office was sorting out the ruling's impact, but said the tax will have to be retooled because of the portion the court found unconstitutional.
"That means we have some more work to do," Adler said.
Under a graduated income tax, different amounts of income are taxed at different rates. For example, someone earning $50,000 would be taxed at 10 percent, but if earning $60,000 would instead be taxed at 12 percent.
Under the law signed May 25, once most taxpayers turn 67, they get an income exemption of $20,000 for single filers and $40,000 for joint filers. But they wouldn't have been eligible for those exemptions under Snyder's tax if their household income exceeds $75,000 for single filers and $150,000 for joint filers.
The court found that to be an illegal graduated income tax, but said it "could reasonably be severed."
"In our efforts to ensure a simple, fair and efficient tax system, we believed it was appropriate for those individuals at the higher end of the income scale to contribute," Snyder said. "This ruling still protects the exemptions for those at lower income levels, but also now applies equally to everyone across the board."
The AARP of Michigan and other opponents argued the state constitution dictates public pensions must be tax-free.
Critics called for the Legislature to repeal the tax.
"AARP calls on lawmakers to now repeal this unfair and unpopular tax on public and private pensions," AARP Michigan President Eric Schneidewind said in a written statement.
"Retirees had planned their future based on the no-tax status of pensions and the Legislature should restore that promise."
Zach Pohl, spokesman for We Are the People, a group representing seniors, students and workers, called the ruling "flawed" and that it "gives a green light to Gov. Snyder to raise taxes on Michigan seniors during the worst economy since the Great Depression."
"Less money in the pocket of Michigan seniors will mean less money to spend at local business on food, groceries and prescription drugs," he said in a statement.
From The Detroit News: http://detnews.com/article/20111119/METRO/111190346/Mich.-Supreme-Court-upholds-tax-on-pensions#ixzz1eM7MPLTg
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