Markman
Snyder
LANSING, Mich. (Legal Newsline) - The Michigan Supreme Court earlier this month approved most of Gov. Rick Snyder's controversial plan to tax pensions.
After a group of state retirees filed a challenge to the new tax law, Snyder had asked the Court for advisory opinions on the constitutionality of its four provisions. They include:
- Whether reducing or eliminating the statutory exemption for public pension incomes impairs accrued financial benefits of a pension plan (or) retirement system of the state (or) its political subdivisions;
- Whether reducing or eliminating the statutory tax exemption for pension incomes impairs a contract obligation in violation of the state constitution or U.S. Constitution;
- Whether determining eligibility for income tax exemptions on the basis of total household resources, or age and total household resources, creates a graduated income tax in violation of the state's constitution; and
- Whether determining eligibility for income tax exemptions on the basis of date of birth violates equal protection of the law under the state constitution or the 14th Amendment of the U.S. Constitution.
In May, Snyder signed into law Enrolled House Bill 4361, which became 2011 PA 38. The provisions at issue are MCL 206.30(7) and MCL 206.30(9) of the Income Tax Act, which will take effect Jan. 1.
Before 2011 PA 38 was enacted, public pension benefits were completely deductible and private pension benefits were deductible up to $42,240 for a single return and $84,480 for a joint return, and all taxpayers were entitled to a personal exemption of $2,500.
Pursuant to 2011 PA 38, however, not all public pensions are deductible, not all private pensions are deductible up to $42,240 or $84,480, and not all taxpayers are entitled to a personal exemption.
Instead, only those taxpayers whose total household resources are less than $75,000 for a single return or $150,000 for a joint return are entitled to the entire personal exemption -- which is now $3,700 -- while those taxpayers whose total household resources are between $75,000 and $100,000 for a single return or $150,000 and $200,000 for a joint return are entitled to a portion of this personal exemption, and those taxpayers whose total household resources exceed $100,000 for a single return or $200,000 for a joint return are not entitled to any portion of the personal exemption.
In addition, while 2011 PA 38 does not affect the available pension deductions of those people born before 1946, it does affect the pension deductions of those people born in 1946 and thereafter.
For those people born on or after Jan. 1, 1946 and not after Dec. 31, 1952, public and private pensions are subject to the same deductions up to $20,000 for a single return and $40,000 for a joint return. And, upon reaching the age of 67, although the pension deductions are no longer available, a general deduction is available for those people up to $20,000 for a single return and $40,000 for a joint return as long as the taxpayer's total household resources do not exceed $75,000 for a single return or $150,000 for a joint return.
Finally, for those people born after Dec. 31, 1952, although the pension deductions are no longer available, upon reaching the age of 67, a general deduction is available up to $20,000 for a single return and $40,000 for a joint return as long as the taxpayer's total household resources do not exceed $75,000 for a single return or $150,000 for a joint return.
However, if a taxpayer takes the general deduction, he or she cannot take the deduction for social security benefits or the personal exemption.
The Court, in its Nov. 18 opinion, held that reducing or eliminating the statutory exemption for public pension incomes does not impair accrued financial benefits; and reducing or eliminating the statutory tax exemption for pension incomes does not impair a contractual obligation in violation of the state constitution or U.S. Constitution.
It also unanimously held that determining eligibility for income tax exemptions on the basis of date of birth does not violate the equal protection of the law under the state constitution or the 14th Amendment of the U.S. Constitution. However, determining eligibility for income tax exemptions and deductions on the basis of total household resources does create a graduated income tax in violation of the state constitution, the Court said.
Justice Stephen J. Markman authored the Court's ruling.
"This Court is not deciding whether 2011 PA 38 represents wise or unwise, prudent or imprudent, public policy, only whether 2011 PA 38 is consistent with the constitutions of the United States and Michigan," Markman wrote.
The Court's decision means the State can still implement much of Snyder's tax plan on Jan. 1. That is, except for the provision raising taxes on those in a higher income bracket, which the Court determined is barred by the state's constitution.
In a statement to the Detroit Free Press, the governor said, "Our administration has been unwavering in its position that the removal of the public pension income tax exemption was the right and prudent thing to do. It will provide for the long-term structural stability of the state's budget while minimizing the impact on current retirees and seniors.
"This will help get Michigan's fiscal house in order and economy back on track."
From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.