Give careful thought to pension tax

Gov. Rick Snyder’s proposed pension tax is the most controversial of several hot issues before the Legislature. It may well go down in flames. But the issue is alive now, and it deserves fair consideration.

Michigan policymakers have long exempted public employee pensions from the state income tax. And, so as not to discriminate, they exempted a portion of private pensions. Coupled with other breaks for seniors, the state now enjoys a reputation of having a tax policy toward seniors that is arguably the most generous in the nation.

But Michigan also labors under the burden of sustaining state services for nearly 10 million residents, a growing portion of whom have retirement income but no tax liability.

That is where Gov. Snyder enters the picture. He has a businessman’s pragmatic assessment of expenses and income. He believes it is time to start taxing pensions. As he asked in a recent interview, “Do we really want a situation that at some point you’re asking all of your young people to pay for your seniors rather than saying we’re simply paying our fair share?” That strikes us as a logical assessment.

But the politics of this issue are explosive. AARP Michigan is mobilizing 1.4 million members to oppose the pension tax. Some legislators already are reluctant to invite a senior backlash.

At the heart of the issue is a question of fairness and equity. Is it fair and equitable that an individual should be exempt from taxes for a stream of income of up to $45,120 while other persons, with the same income, are taxed? How about a couple with an income of $90,240?

The reason we cite those two figures is that they are the amounts of private pension income exempt for a single person and a married couple in Michigan. For public employees, there is no cap. If it’s public-pension income, all of it is exempt from state income tax.

This is a game-changer issue for many people. Michael LaFaive of the Mackinac Center put it bluntly, “In effect, the move charges a retiree with a $40,000 annual pension $1,700 a year for choosing to remain in Michigan rather than move to sunny, income tax-free Florida.” So what is the governor to do? How are lawmakers to respond?

The governor is committed to his proposed economies. You may not like his solutions, but he is trying to save the state from fiscal disaster, which looms in the future if steps are not taken to avert it.

Our initial reaction is that it may be too abrupt and severe to make all pension income taxable in one fell swoop. However, steps could be taken in that direction. For public employees, that could mean setting a ceiling, above which pension income would be taxable. For private pensioners, perhaps it would mean lowering the tax-exemption ceiling. There are other solutions as well, such as a phased-in approach for all.

We do feel strongly about one thing: Whatever is embraced must be part of a comprehensive package of budget cuts and tax reforms that spreads the pain in a way that is perceived as fair by most taxpayers. If, for example, the legislature protects public employees from paying a higher share of health care and pension, but decides to tax pensions, we can understand a huge backlash from seniors. On the flip side, if everyone is doing their fair share in sacrifice, we think a pension tax could more easily be accepted.

The state’s budget crisis was not the result of one or two bad decisions. The solution, therefore, will have to be comprehensive. That means sharing the pain among all the special interests.

Jackson Citizen Patriot