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MN


THE GRAND RAPIDS PRESS

SUNDAY, APRIL 18, 2010

Time to hit the pensions? SOME SAY STATE CAN’T AFFORD EXEMPTION; OTHERS SAY CHANGE IS BAD POLICY BY MONICA SCOTT THE GRAND RAPIDS PRESS

GRAND RAPIDS — As Michigan grapples with yet another budget deficit, some say it’s time to eliminate generous tax exemptions for retirees. The state exempts more retirement income than any of the other 40 states with income taxes. Public pensions have always been 100 percent exempt. Private pensions are exempt up to $45,120 for a single person and $90,240 for a couple, indexed to inflation. “The pension system does not reflect our economic reality whatsoever and is long overdue for reform,” said Paul Menchik, a professor of economics at Michigan State University and authority on public finance. “We cannot afford this; it’s not like we are floating in money.” The estimated annual cost of private pension income exemptions is $725 million, according to 2007 data from the House Fiscal Agency. In a 2009 report, the Pew Center on the States questioned the logic of Michigan’s senior tax preferences, given its declining revenue. The state was among 10 cash-strapped states identified with growing, aging populations contributing little to the services demanded. Sharon Parks, president and CEO of the Michigan League for Human Services, said the pension issue is vital now as the first wave of baby boomers turns 65 in 2011. “These policies are going to matter as baby boomers age and these tax preferences get more expensive,” Parks said. “We need to examine all our fiscal policies to see if they make sense from a revenue standpoint.” The League has made several suggestions to increase revenue and reduce special preferences, including ending or freezing inflation increases for pension or investment income and establishing a minimum age for pension exemptions. Today, 12.8 percent of the state’s population is 65 or older. By 2020, that portion is projected to be 16 percent,

20 percent by 2030. “If the provisions remain, indexed to inflation, the value will increase each year, and more people will become eligible for the exemptions,” said Mitch Bean, director of the House Fiscal Agency. Changes could be made to taxing private pensions, Bean said, but taxing the pension benefits of state public retirees is not permitted under the constitution. The governor’s proposal to address the $1.5 billion budget deficit does not include targeting pensions and it’s not the tax change for which lawmakers are clamoring. Why? Parks said they are unwilling

to do anything they think might cost them votes. Sen. Mark Jansen, a Kent County Republican, said it would be hard to persuade him to go down the pension path. But it’s not about votes, he said. “It sounds like bad public policy,” said Jansen, a member of the appropriations committee. “You would be looking for money from folks who planned their whole life based on this retirement income. There is a lot of money spent by retirees in this state.” Jansen said retirees could just move to Florida and Arizona. Liz Boyd, spokeswoman for Gov.

Jennifer Granholm, said the governor is not currently proposing changes in how the state taxes retirement income. “We considered many options to address the $1.5 billion budget deficit. In the end, the governor decided on the best proposal,” Boyd said. Tax equity is also at issue. While pension income is untaxed, the wages earned by seniors who remain in the work force are taxed. “It’s a travesty that somebody with that much retirement income need not pay any income tax but workers earning far less pay,” Menchik said.

A look at two major tax restructuring proposals being advocated in Michigan:

FAIRTAX Based on a proposal advocated by MI FairTax, which argues the current system is too complex and unfairly burdens lower and middle classes: The MI FairTax proposal would eliminate the Michigan Income Tax of 4.35% and the Michigan Business Tax and replace those taxes with a 9.75% sales tax on all consumer purchases of goods and services.

FACT SHEET About the pension exemption Michigan exempts more retirement income than the other 40 states with income taxes.  The House Fiscal Agency estimates private pension income exemptions at $725 million a year, based on 2007 data.  Public pensions have always been 100 percent exempt.  Private pensions are exempt up to $45,120 for a single person and $90,240 for a couple, and indexed to inflation.  Today, 12.8 percent of the state’s population is 65 or older. By 2030, that number will be 20 percent. SOURCES: Pew Center on the States and the rest House Fiscal Agency

E-mail: mscott@grpress.com

‘WHAT HAPPENED TO OUR REVENUE?’ AND OTHER MYSTERIES

COMING MONDAY

QUESTIONS TO TAX

Peter Luke column: How one of the nation’s most progressive tax systems in the 1980s gave way to one of the most regressive in the 1990s.

NO EASY ANSWERS FOR STATE HIT BY JOB LOSSES, SPENDING DECLINES

Question-and-answer: Gary Olson, who heads the nonpartisan Senate Fiscal Agency.

Gary Olson

Charles Ballard

COMING TUESDAY Join the conversation: Olson and Michigan State University economist Charles Ballard will field your questions in a live online chat 11:30 a.m. Tuesday. Go to MLive.com/mi10

SERIES AT A GLANCE

THE MATCHUP MI FairTax vs. Graduated Income Tax

A13

AP FILE PHOTO

In need of capital: The Michigan Capitol building in Lansing.

Frequently asked questions about Michigan’s tax structure IS MICHIGAN A HIGH-TAX OR A LOW-TAX STATE? Compared with the rest of the nation, Michigan is about in the middle, in terms of per capita state and local tax collections. Compared with itself, Michigan is a lower tax state than it was a decade ago. When voters approved the Headlee Amendment in 1978, they voted to cap how much money state government could collect in assorted taxes and fees. That cap is 9.49 percent of total Michigan personal income in a given year. In 2000, the state was just about at that cap. In fiscal year 2010, it’s estimated that the state will take in 6.88 percent of total personal income in taxes and fees, about $9.1 billion under the Headlee cap. WHAT HAPPENED? A decade of job loss is the main culprit. Michigan takes in less in real dollars from its three main taxes — personal income, sales and business — than it did a decade ago. There are structural issues as well. The amount of retirement income exempt from state income taxes is annually indexed to inflation, so there is less income to tax. Consumers are also spending less on goods that are subject to the sales tax and more on services that generally aren’t.

JANUARY What will it take to get Michigan working again? FEBRUARY Is it time to pay the toll? We can’t fix roads without funding. MARCH Is selling natural resources one solution? APRIL Tax changes could eliminate our deficit, but at what cost? MAY Is it time to take some communities off the map?

GRADUATED INCOME TAX Based on a proposal advocated by Michigan League for Human Services. Examples from a graduated income tax structure with the following brackets:  3.9% — $0 to $40,000  4.35% — $40,001 to $120,000  6.9% — $120,001 and above

EXAMPLES Family of four (two children) with income of $74,000 and taxable consumption of $24,000:  With a flat rate of 4.35%, this family has an income tax liability of $2,540 assuming no credits or deductions except for personal exemptions of $3,600 per person and $600 additional exemption for each child.  Under the graduated proposal, liability drops $180, to $2,360.  With the MI FairTax rate, liability drops to $190 (after consumption allowance of $22,050) for a net savings of $2,350. Family of four (2 children) with income of $147,000 and taxable consumption of $47,000:  With a flat rate of 4.35%, this family has an income tax liability of $5,716, again assuming no other credits or deductions.  Under the graduated proposal, liability rises $111, to $5,827.  With the MI FairTax rate, liability is $2,433 (after consumption allowance of $22,050), a savings of $3,283 compared with the income tax.

WHAT DOES GOV. JENNIFER GRANHOLM’S SERVICE TAX PROPOSAL DO? Michigan taxes few services relative to other states. Her proposal would have Michigan taxing more services compared with other states. On a full-year basis, taxing services would cost consumers nearly $1.6 billion. But the plan also cuts the sales tax rate on both services and goods from 6 percent to 5.5 percent, for a tax cut of about $522 million. A year’s worth of combined cable television and Internet service, at $100 a month, would cost consumers $66 in tax. The purchase of a $25,000 car would bring a tax break of $125. WHERE WOULD THE MONEY GO? In the first year, fiscal year 2011, $554 million would be deposited into the state’s school aid fund for K-12 education. The remainder would fund reductions in the Michigan Business Tax. By fiscal year 2013, almost all of the new revenue generated by the sales tax on services would pay for business tax relief. SO IS IT A TAX INCREASE? Right now it would be, overall. Granholm administration officials argue that the $140 it estimates it would cost an average family in higher sales taxes would begin to be offset in 2012 when the personal income tax rate begins ticking back down from 4.35 percent to 3.9 percent. If you golf, go to the movies, send your clothes to the dry cleaner every week and hire a lawn service to tend your yard, you’ll pay higher sales tax. But there are a lot of taxpayers who go to the hardware store to buy parts for a leaky faucet — taxed at the new lower rate — that they fix themselves rather than call the plumber.

JUNE Can our cities ever be cool? A look at stopping “brain drain.” JULY Do tax incentives bring new jobs? Should the state favor some industries over others? AUGUST Does Michigan need 553 school districts? SEPTEMBER Are labor unions the problem? OCTOBER Tear up the state constitution? The question is on the November ballot.

IF THE STATE IS TAKING IN SO MUCH LESS MONEY, HOW DOES IT KEEP THE BUDGET IN BALANCE? On a temporary basis. Billions in federal stimulus money will keep the books balanced for three straight fiscal years, including fiscal year 2011. Increases in business and income taxes did balance the budget in 2008, but then the financial meltdown hit and revenue cratered. Overall federal aid to Michigan is double in fiscal year 2010 than it was in fiscal year 2000. The state spends less from its main tax sources for its largest agency, the Department of Community Health, than it did a decade ago. Federal support for the department, which provides Medicaid services to 1.7 million residents, is up nearly $5 billion from 2000. IF THEY WOULD JUST CUT THE BUDGET, THEY WOULDN’T HAVE TO RAISE TAXES, RIGHT? Well, they are cutting the budget. The fiscal year 2010 budget spends $1.4 billion less from state taxes and fees than the 2009 budget. Eightythree percent of the state’s general fund budget is spent in just four areas: community health, higher education, human services and corrections. Lawmakers could eliminate optional prescription drug coverage for Medicaid patients and save Michigan taxpayers about $178 million. But Michigan’s economy would lose not only that amount, but the $488 million in federal funding that matches it. WHY NOT CUT SALARIES FOR THE LEGISLATURE? Not that it’s a bad idea, but it doesn’t save much money. Cutting the Legislature’s budget by 20 percent would save about $18 million.

SOURCES: mifairtax.org and milhs.org/

— By Peter Luke, Press Lansing bureau

Miss an installment? Go to mlive.com/mi10

0418-Mi10-Taxes  

MIXORMATCH ALLITEMSONLY$1EACH! WITH www.familyfaresupermarkets.com 3662481-01 Cigarette tax per pack Beer tax per gallon $2.0 0.5 1.0 0 1.5

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