Michigan's pension tax issue more complex than characterized
John Leipzig
As a retired academic, my concern is that incomplete information can become “truth” in the minds of those who do not take the time to research claims.
I call your attention to a very insightful report by the National Conference of State Legislatures entitled State Personal Income Taxes On Pensions & Retirement Income: Tax Year 2010 (www.ncsl.org/?tabid=12657). The covering document talks to the rationale behind state income tax exclusions and the full report contains a state-by-state comparison of the income tax policies for pensions broken down by type of pension.
A more complete picture of how states tax pensions comes from the covering document and includes the following: (I am quoting from the document liberally): • Seven States (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) do not have a tax on any income and two others (New Hampshire and Tennessee) tax only dividend and interest income.
• Forty-one states have a broad-based income tax and 36 of those states exclude “some or all specifically identified state or federal pension income or both, retirement income exclusion or a tax credit targeted to the elderly.” DC excludes federal and District income.
• Five states offer no income tax exclusions (California, Nebraska, North Dakota, Rhode Island and Vermont).
• Ten states exclude all state and local government pension income (Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania).
• Eleven additional states offer partial tax exclusions (Idaho, Iowa, Kentucky, Maine, Missouri, Montana, New Jersey, North Carolina, South Carolina, Oklahoma and West Virginia).
• Other states provide a variety of exclusions by age and source of income. The document continues to discuss Social Security exclusions and state specific pension exclusions for types of pensions. Private sector pension income exclusions do vary by state and the document covers those exclusions as well (again, I quote directly from the document): • Pennsylvania excludes all private sector retirement income.
• Alabama excludes defined benefit plan income.
• Hawaii excludes income from contributory plans.
• Illinois and Mississippi exclude income from qualified retirement plans.
• Louisiana, Michigan and New York cap the private sector exclusion at a set dollar amount. The statement about Michigan being “one of only four states in the country with an income tax that doesn’t tax pensions” is (if one is being generous) at best incomplete. Gov. Snyder has been active in promoting an image that Michigan somehow is unusually distinguished by its generosity in providing tax exclusions for pension income and he offers up a plan that would tax all pension income irrespective of source, only excluding Social Security. If adopted as is this plan would place Michigan with those few states that are very ungenerous in terms of pension income exclusions. Another issue not discussed is the fairness of excluding Social Security income when some government retirement pensions held by Michigan retirees (Alaska and Ohio, for example) are earned in lieu of Social Security. I would ask why it would be “fair” to tax those pensions, which take the place of Social Security, when the governor’s plan gives an exclusion for Social Security income. Should not the argument for excluding these types of pensions be the same as for excluding Social Security income? My point is that the pension tax issue is much more complex than the characterizations that I have been hearing and reading of late. I am personally not disinclined to accept a pension tax plan that is robust and equitable. I am not as inclined to accept a pension tax structure that is overly simplistic for the purpose of meeting other administrative goals.
I am especially troubled by this administration’s vilifying of retirees and public sector employees as not paying their fair shares toward a plan that may or may not yield positive results in the end. Unfortunately we seem to be witnessing the competition for and resultant mean-spiritedness that results when resources become scarce within a system. John Leipzig, PhD, resides in Pittsfield Township and is a professor of communication and dean, emeritus, at the University of Alaska Fairbanks. He is the former director the Center for Responsible Leadership at Alma College.
Comments
Elly
Sun, Mar 27, 2011 : 4:26 a.m.
An excellent article Dr. Leipzig. You have done your research well, unlike Mr. Snyder and/or Mr. Nixon. Hopefully your information will be considered by those involved in making the final decision about the budget. As a retiree I am also not in favor of paying taxes on the pension I worked so hard to put in place for the future. I would, however, not be opposed to paying my fair share. Perhaps the Governor and Legislature should devise a plan that would be somewhat more equitable for all. My suggestion would be to lower the exclusion on private pensions to $35,000 for an individual/ $70,000 for a couple, and extend the tax to public pensions as well. This should offer protection to lower income retirees while spreading the tax to those who could better afford to pay. Also the Business Tax reduction might be phased in over a period of years rather than an immediate, one time reduction. This seems to me to be more in line with the, "Shared Sacrifice" of which the Governor so often speaks. This plan might also reduce that "Giant sucking sound" heard when our retirees head out for states that are more receptive to us. As you so aptly stated, there are many states that would be happy to have us spending our limited incomes in their businesses.
paul b
Mon, Mar 21, 2011 : 8:47 p.m.
Like most people I have no pension and will fund my retirement with an IRA. I saved most of the money in it from my income and will pay tax when I take money out. To be fair, if pensions are not taxed then IRA withdrawls should not be either.
Elly
Sun, Mar 27, 2011 : 4:27 a.m.
As one who also has IRAs I totally agree.
Lifelong A2
Mon, Mar 21, 2011 : 1:43 a.m.
Dr. Leipzig appears to make well-researched points, but here's the larger issue: when will people -- in this case, individuals with public pension income -- stop trying to avoid paying taxes? This principle is particularly important here, where most other people and entities -- workers, private pensioners, businesses, etc. -- pay taxes? The "I want something for nothing" mentality in this nation must end.
Elly
Sun, Mar 27, 2011 : 4:31 a.m.
I don't feel it is a "want something for nothing mentality". It is a simple matter of wanting to retain what we were promised when we were asked to pay into our pension fund. Is it too much to ask for a promise to be upheld? Apparently in Michigan, it is!
Grace York
Mon, Mar 21, 2011 : 12:23 a.m.
Thank you, Dr. Leipzig, for your well-researched and must needed article. I hope you will share it with our representatives in the Legislature if they haven't already read it.
Dr. G.
Sun, Mar 20, 2011 : 11:11 p.m.
Your article was excellent Mr. Leipzig and I sent a copy to Mr. Snyder. I don't expect he will read it as, if he was authentically interested in research fact and diverse opinion he wouldn't have made the proposals he made much less run for public office at this time. I see this state as spiraling downward into degradation, even further away from sustainability than ever. His is a bloodless coup; achieving in a devious and disingenuous manner what other countries do through violent revolution: annihilating the intelligensia and any reference to history and the reservoir of wisdom from which true growth would emerge. This is a continuing, long, sad time for all of us.
aataxpayer
Sun, Mar 20, 2011 : 11:06 p.m.
John, Nice opinion column. Ultimately, however, the new policy is better. I can't justify an income tax on struggling single moms while giving pensioners a pass.
Grace York
Mon, Mar 21, 2011 : 12:29 a.m.
I don't think that's what he's saying. He's trying to suggest options for taxing pensioners other than the 0% to a complete 100% approach. Many seniors would be willing to pay more in taxes to help out those single mothers who are struggling as well as the education of their children.
Technojunkie
Sun, Mar 20, 2011 : 3:34 p.m.
We could just pass the Michigan FairTax plan and scrap state income taxes entirely, but that would destroy too many accounting and other paper-pusher jobs I suppose. mifairtax.org
Basic Bob
Sun, Mar 20, 2011 : 3:12 p.m.
"Unfortunately we seem to be witnessing the competition for and resultant mean-spiritedness that results when resources become scarce within a system." The victims of this competition will ultimately be the middle class private sector workers and their families, which neither party adequately represents. Or even cares about.
Cash
Sun, Mar 20, 2011 : 2:23 p.m.
Selective Sacrifice is Snyder's real mantra....select the poor and elderly and raise their taxes. Hand that money to major corporations and let them make a higher profit. The wealthy, even those with "blind trusts" should fare well.
DonBee
Sun, Mar 20, 2011 : 2:49 p.m.
Have you gotten a real petition started yet to change the state constitution?
Mr. Ed
Sun, Mar 20, 2011 : 1:59 p.m.
John thank you for your research and comments. Reporting on this issue has been one sided and the Ann Arbor.com always slants. Reporters use to dig for facts and get to the truth. It seems now reporters are just bloggers with no regard for the truth. Snyder will be recalled just waiting until July.
Cash
Sun, Mar 20, 2011 : 1:58 p.m.
Don Bee, If individuals should think as you say, then big business should say "Oh no don't hand us any more corporate welfare in the form of tax cuts! We will start paying our fair share. We need to save our state!" Apparently only the poor and elderly should want to save their state and the next generation. Big business should hold their hands out and take their money! And the highest income bracket, should ask to be taxed at a higher rate, as some have done....but only a handful. Why wouldn't the wealthiest Michiganians want to pay to help their state more? _________________________________________________ This is the question the wealthiest Michiganians need to ask: "Should my desire to be treated in a special way, disadvantage the next generation? Shouldn't I pay more to save my state? " Only you can answer this question.
Cash
Sun, Mar 20, 2011 : 3:32 p.m.
I read the Detroit paper daily...year around. I then I do my own analysis. Never take the information you get from Scripps or Gannet and digest it as truth.....any more than you would from Newhouse.
Edward R Murrow's Ghost
Sun, Mar 20, 2011 : 2:54 p.m.
More mis-leading "facts". The term "small business" is meaningless. Snyder is proposing ending taxation of S-type corporations and changing the taxation on C-type corporations. Yes, some C-types will pay more and some will pay less. But the belief that S-types are "small" is sheer and utter nonsense. There are some VERY large S-type corporations in this state. But "small" business makes it sound like it's grandma's candy store that will benefit from this legislation. And the lemmings march in lock-step toward the cliff . . . Good Night and Good Luck
DonBee
Sun, Mar 20, 2011 : 2:48 p.m.
I suggest you grab last week's Detroit papers at the Library Cash. Dozen's of business tax loopholes, carve outs, and abatements are history if the budget passes. The only business tax cuts are to the small business folks, Ford, GM and many other companies in the state will see taxes RISE. But never let the facts get in the way of someone raising YOUR taxes. Instead it is only OK to raise other people's taxes.
Cash
Sun, Mar 20, 2011 : 2:26 p.m.
Oh, I meant future gov Ed...didn't want that to be confused with the Governut.
Cash
Sun, Mar 20, 2011 : 2:24 p.m.
That's right governor Ed.
Edward R Murrow's Ghost
Sun, Mar 20, 2011 : 2:10 p.m.
But Cash, Businesses aren't people. That is, unless you are a Supreme Court Justice deciding a vital 1st Amendment case. Then they are just the same a people. Good Night and Good Luck
DonBee
Sun, Mar 20, 2011 : 1:35 p.m.
As a state over time we have accumulated hundreds, if not thousands of special carve outs for different people in the state. From State Police to the Military to Teachers to .... What the Governor proposes is a step to reducing the complexity of the tax system and making it more fair, at least from the standpoint of people paying about the same percentage of their income to the state. This goes not only for individuals but businesses as well. This is the question you need to ask: "Should my desire to be treated in a special way, disadvantage the next generation?" Only you can answer this question.
Betty
Sun, Mar 20, 2011 : 1:22 p.m.
I very much enjoyed your piece as I was troubled by the over simplification of the "one of only 4" comment as well. (I'm a financial planner by trade). That being said, after reviewing the Governor proposal it does seem more fair and simple than the budget and tax systems we have been bamboozled with for what seems like decades now. Our (Michigan) system is broke, politicians exaggerate and the media capitulates. The "rich" won't pay and the "poor" can't pay so the middle will have to pay...like retirees with pensions.
Heardoc
Sun, Mar 20, 2011 : 1:13 p.m.
You article really points to the complexity of our tax laws and the failure of those in social engineering that have attempted to utilize the taxing system as a means to redistribute wealth. In this social engineering endeavor, there was a time when those doing the engineering felt that pensions should not be taxed-- and I am sure you have been content with that viewpoint. Problem for you and most people is that once the government has a tax there are several things that are sure to happen ; 1) The tax will never be repealed, 2) the tax will always increase and 3) the tax will evolve into something the original proponents had not intended. Now, as a retired academic (I believe that is what you called yourself) you have enjoyed some benefits already that are not available to the masses -- your retirement account, if it is a TIA CREF account, has already received preferential tax treatment during your working years and now you are complaining about taxes? Most academics are from the far left (or at least democratic) and have supported tax increases -- is your complaint that this will now affect you personally? I think you just missed the entire point and went off in a tangent that is really not pertinent to the need to cut expenses and increase revenue in order to pay for the bills we currently have -- you, as a former public employee, should be more than happy to be sure that government has enough money............
bugjuice
Sun, Mar 20, 2011 : 2:24 p.m.
The redistribution of wealth has little to do with taxes. It has to do with the laws, or lack of, unfettered "free market" capitalism structured in ways that have little regard for social and political consequences. The redistribution of wealth is from the bottom up and the facts are supported by many studies. We are in the second great "Robber Baron" chapter in our history where capitalists, aided and abetted by their friends in Congress are have a huge advantage in the marketplace. And his is in the name of restoring our economy.
David Briegel
Sun, Mar 20, 2011 : 1:44 p.m.
That "redistribution of wealth" really worked, eh? As the wealth gushed upwards your dreaded social engineering has occurred.
Doug Gross
Sun, Mar 20, 2011 : 1:10 p.m.
This was a nicely done analysis that shows nationwide taxation of retirement income varies broadly at the state level. At the national level however there is of course just one system and the federal government taxes all pension income and 85% of social security for many retirees. 7 reasons pensions need to be taxed 1. Fairness: If I'm retired but work at Wal-Mart, my income is taxed; if I'm paid because I used to work but now get a pension I'm not taxed? 2. Equity: I'm 40 years old, have 3 kids, a mortgage, and paying for college so all my income is taxed, if I'm paid because I used to work but now get a pension I'm not taxed? 3. Pension taxes were not "paid in advance": I did not pre pay my tax liability when I worked; in fact when I was working the government was running deficits so I was not really even paying my own way then! 4. The government is paying for my retiree healthcare today that was not funded when I was working and paying taxes. 5. As a retiree I still use all the services I did before, in fact more. Shouldn't I continue to pay for them since we know I did not pre pay them? 6. I want my kids to have jobs. If I don't pay taxes someone else is paying more in taxes. Theses companies may employ my children if they thought Michigan was an attractive place to do business. 7. I want Michigan to be prosperous, to have good roads, schools and community services. I need to pay taxes to get these services as I did not prepay the cost of running the government when I retire.
David Briegel
Sun, Mar 20, 2011 : 1:01 p.m.
The lie stands next to the truth as an equal. You are on your own to figure it out! So sad for freedom and democracy.
Edward R Murrow's Ghost
Sun, Mar 20, 2011 : 12:49 p.m.
And let me add one more level of complexity: By the governor's proposal, military pensions will remain untaxed. And, for the record, that benefits ME!! So much for not picking winners and losers. Good Night and Good Luck
johnnya2
Sun, Mar 20, 2011 : 12:58 p.m.
Here here. I will also point out that all those people who complain about "federal employees" forget that members of the military are paid through tax dollars, AND have a benefit package that includes free health care and education.
Townie
Sun, Mar 20, 2011 : 12:49 p.m.
AA.com doesn't want to waste money on research and getting the facts straight -- esp. if it makes their endorsed candidate look bad. Ever wonder why SPARKS ridiculous job creation claims were never investigated? News today at all levels is simply 'he said, she said' with no attempt to find out who's right, what the truth and facts are. No wonder our electorate is so uninformed and votes so frequently against their country's and their own best interests.
Brad
Sun, Mar 20, 2011 : 12:43 p.m.
Why is it that the "opinion" pieces are routinely more well-researched than the internally generated articles?
bugjuice
Sun, Mar 20, 2011 : 2:15 p.m.
aadotcom's bandwidth isn't big enough for facts
jcj
Sun, Mar 20, 2011 : 1:55 p.m.
Part of the problem is that the facts all too often do not have much bearing on opinions.
Edward R Murrow's Ghost
Sun, Mar 20, 2011 : 12:47 p.m.
Indeed. Good Night and Good Luck