Democrats unveil new plan to reduce taxes on retirement income

The plan also appears designed to avoid what was an expected 0.2 percentage point cut in the state’s 4.25% income tax rate, by diverting about $800 million in 2022 revenue from the state’s general fund to issue $180 rebate checks to Michigan tax filers. Michigan Republicans were quick to attack the plan, on that basis. “The people of Michigan should see through Gov. Whitmer’s attempt to offer them a temporary bribe to cover up a disastrous tax hike,” said state Rep. Andrew Beeler, R-Port Huron. Whitmer continued to insist it is too early to say whether the expected income tax rollback would have taken effect, since the state’s Annual Comprehensive Financial Report will not be published until March, and said the pension plan would restore tax exemptions to seniors who had the “rug pulled out from under them” by former Gov. Rick Snyder and legislative Republicans in 2012. The pension tax changes would kick in more quickly for some retirees than for others, under a report adopted by a joint House and Senate conference committee on House Bill 4001, in a 4-2 party-line vote. When Snyder changed the way pensions were taxed, he exempted Michiganders on private pensions who were born before 1946. For the 2022 tax year, those retirees were able to deduct up to $56,961 of private retirement income if filing alone, and up to $113,922 of retirement income, if filing jointly with a spouse. Those deduction caps are increased yearly to keep pace with inflation. Under the new Democratic plan, all retirees would be treated the same way as those private pensioners who Snyder exempted from his plan, once the new proposed law is fully phased in. Public pensioners, who were not subject to any state income tax prior to the 2012 changes, would have their pensions taxed in the same way as private pensions are, but with the phased-in higher deduction amounts. The exception would be Social Security income, which would remain tax-free. The changes to pension taxes would apply to income from both pensions and 401(k) plans and are expected to reduce Michigan general fund revenues by $58 million this year, with that amount increasing to $515 million by 2026. Under the plan:

• Taxpayers born before 1946 would continue to have their pensions taxed the same way they are now;
• For the 2023 tax year, Michiganders born after 1945 and before 1959 would be able to deduct retirement income up to 25% of the maximum deduction the retirees exempted by Snyder are able to take;
• For the 2024 tax year, Michiganders born after 1945 and before 1963 would be able to deduct retirement income up to 50% of the maximum deduction the Snyder-exempted retirees enjoyed;
• For the 2025 tax year, Michiganders born after 1945 and before 1967 would be able to deduct retirement income up to 75% of that maximum deduction; and
• For the 2026 tax year, all Michiganders would be able to claim that maximum deduction for retirement and pension income.

The legislation contains one other special provision. Those collecting retirement income as public police officers and firefighters, county corrections officers, and state police troopers and sergeants, would be able to take the maximum deduction beginning in the 2023 tax year. As for the $180 tax rebate checks, the bill retroactively diverts $800 million in general fund revenue from the 2022 fiscal year to the Michigan Taxpayer Rebate Fund, which would then be the source of the money for the checks, provided the bill takes effect before April 18 of this year. Under the proposal, a couple who files jointly only gets one $180 check. The bill also clarifies that should that couple opt to file separately, each would receive only a $90 check. A 2015 law provided for a rollback of Michigan’s income tax rate for the 2023 tax year, should general fund revenues exceed a certain cap. The House Fiscal Agency calculated in March that revenues were likely to exceed that cap by about $700 million, resulting in a reduction in the income tax rate from 4.25% to 4.05%. Under the bill, those revenues would never actually reach the general fund, so the income tax rollback would not be triggered. Getting immediate effect for the legislation in the Senate would require a handful of Republican votes. And starting in 2023, should corporate income tax revenue exceed $1.2 billion, the first $50 million of excess would be deposited in the Michigan Housing and Community Development Fund, the next $50 million would be deposited in the Revitalization and Placemaking Fund, and up to $500 million of any remaining excess funds would be deposited in the SOAR (Strategic Outreach and Attraction Reserve) Fund, used to lure new industry. That distribution of excess corporate income tax funds would continue through the 2025 fiscal year, after which only the first $50 million in excess revenue would be deposited in the Michigan Housing and Community Development Fund, with the rest remaining in the general fund. As previously reported, the bill also increases the state Earned Income Tax Credit to 30% of the federal credit, up from 6%, beginning in the 2023 tax year. The House was expected to vote on the measure Wednesday, but didn’t. The House could take it up Thursday, followed by the Senate.