Governor proposes state pension tax repeal

Gov. Gretchen Whitmer called for repealing the state pension tax in her 2019-20 state budget proposal unveiled today (March 5).

The governor, who campaigned last year on repealing the pension tax, said the change would affect some 400,000 Michigan taxpayers who would receive an average tax break of about $800.

The plan must be approved by the state House and Senate to become law.

The pension tax went on the books in January, 2012.

Public and private pensioners born Jan. 1, 1946 and later were affected by the tax change. Those born before 1946 continued to receive the same tax breaks they had been getting.

The three-tiered pension tax works like this:

Michigan residents born before 1946 are exempt from the tax. Public pensions, Social Security payments and military pensions are not taxed. Income from private pensions, 401(k)s and IRAs are not taxed on amounts up to $45,120 for single filers and $90,240 for joint filers.

Those born between Jan. 1, 1946 and Dec. 31, 1952 have all their retirement income subject to tax. Exemptions can be claimed for up to $20,000 for an individual filer and up to $40,000 for joint filers. Above those income levels, retirement income is taxed at the state income tax rate of 4.35 percent. When these residents turn 67, the $20,000/$40,000 exemption applies to all income, not just retirement income.

Residents born after 1952 will see all retirement income taxed as regular income at the 4.25 percent rate until they reach age 67. At that time, they qualify for the $20,000/$40,000 exemption on all income, including Social Security. But a taxpayer can choose to forgo the $20,000/$40,000 exemption and instead deduct 100 percent of Social Security income. A taxpayer claiming the $20,000/$40,000 exemption cannot claim the deduction for Social Security or the standard personal exemption.

At the time the tax went into effect, 480,000 residents born before 1946 were exempt and 380,000 born later paid the new tax.

Repeal of the tax enjoys support of both Republicans and Democrats in the Legislature. The House Tax Policy Committee recently voted out a pension tax repeal bill by a 14-1 tally.

AARP Michigan supports the bill because for nearly 50 years, Michigan workers planned for retirement based on the promise that their pensions would not be impaired or diminished by the state. When the pension tax passed, it changed the effective value of their pension benefits after the fact for a group of people on fixed incomes. Meanwhile, Michigan residents continue to face an erosion of their retirement security in other ways, including threats of cuts to Social Security and less confidence that the pensions and other post-employment benefits promised to them as workers will be fully honored.