Several days ago, an Ann Arbor resident named Lynn Borset told me: “You may not realize it, but the vast majority of Michigan retirees’ income is exempt from state income tax, even if they are relatively well-off.” She added, “I really think this is a serious revenue loss for Michigan,” one that will get worse as more people retire.
I was intrigued by that. So I decided to ask an expert: Charley Ballard, a professor of economics at Michigan State. Dr. Ballard is the author of a book called “Michigan’s Economic Future,“ and knows more about our state’s economy than anyone else I know.
He was kind enough to take some time on Easter to inform me that not only was Ms. Dorset right, the problem was even bigger than either of us knew. “It’s not just state employees who don’t have to pay tax on their pensions. Michigan completely exempts the pensions of state government employees, and also completely exempts the pensions of local government employees and federal employees and military retirees. AND we exempt Social Security income completely.
“AND we are more generous than any other state in exempting private-pension income up to a pretty high threshold. For the 2009 tax year, private pensions are exempted up to $45,120 for a single person, and twice as much for a married couple.”
Such a couple can have retirement income of well in excess of $100,000 a year and pay not a penny of Michigan income tax.
And, “that’s not all. Michigan seniors get an additional personal exemption that the rest of us don’t get.
“AND the Homestead Property Tax Credit is more generous to seniors than to the rest of us.” Bottom line: Something like 90% of Michigan seniors pay no (state) income tax. Since the Homestead Credit is refundable, many actually pay negative taxes.”
Suddenly, getting older sounds lots more attractive. But is the total revenue loss all that significant? You bet your sweet bippy, as we used to say back in the ‘60s. Dr. Ballard told me that a former PhD student of his calculates this costs the state $700 million dollars a year, a figure that will only grow as the state’s population ages.
Charley Ballard, who like me is in his fifties, observed that “Not only are we building in an ever-increasing revenue loss at a time of chronic fiscal crisis, but there is also a matter of basic fairness.
“When I retire, my taxes will go WAY down, possibly to zero or near zero, even though my income won’t drop nearly as much,” he said. That will be great for him, but bad for Michigan.
“I hope the laws are changed,” the professor told me, adding, “I’m for a graduated income tax, because I think we should ask higher income people to pay more, regardless of age, and I want to give a break to lower income people, regardless of age.”
Doing that would take a state constitutional amendment, but we’ve put plenty of them on the ballot before.
Whether you agree with the professor or not, you just might want to let your state lawmakers know what you think.
After all this discussion of who pays what taxes, what exemptions exist, etc, don't you think it's time to strip out all the confusing rules, hurdles, loopholes, etc?
It's time for a flat tax! Everyone pays the same rate, and no more cycles spent on coming up with new crazy ways to tax certain groups within the population.
If the state can't work within the bounds of this revenue, then it needs to learn how to do without, much like how I have to learn to do without when my income is adversely affected.
Posted by: tsol | April 06, 2010 at 01:44 PM
In pursuit of public policy equity-I wonder if the learned professor would care to explore the costs(that is the tax cost) of his cradle to grave post-retirement health benefits or those extremely generous retirement benefits. These issues are far too sensitive and yet strike at the core of the public employee welfare state. Reformation is coming because the private sector taxpayers will insist on alignment with private sector metrics. Watch the teachers scream as 30 and out, annual COLA adjustments and expensive actuarial subsidies are eliminated. The screams will be music to the taxpayers. Care to opine Professor? How about you Jack?
Posted by: Ivoted Forobama | April 07, 2010 at 10:31 PM