Pension tax repeal clears hurdle, but prospects hinge on budget concerns

A House bill that would dismantle the state’s so-called pension tax cleared a hurdle Thursday, but its prospects will depend on whether lawmakers can find money in the budget to pay for the lost revenue.

The House Tax Policy Committee approved the legislation 14-1, but legislative leaders have warned the bill could be subject to additional analysis and change in the coming weeks.

The tax has been a target of bipartisan opposition. But Rep. Joe Bellino, R-Monroe, acknowledged Thursday that his repeal bill would leave a $320 million funding gap, $75 million of which goes toward the School Aid Fund.

The House Fiscal Agency has pegged the potential budget hole at $330 million a year.

The bill would exempt public pensions from being taxed and put in place higher deductibles for state income taxes for other retirement income, reverting to the state tax structure in place prior to 2011.

Introduced on the first day of session in January, the bill also would eliminate Michigan’s three-tiered structure that creates different rules for retirement taxes based on year of birth. 

“It’s just not right to have some of our most vulnerable residents — many of whom live on fixed incomes — struggling to make ends meet because of a tax they never planned for and never expected,” Bellino said in a statement.

The bill next will head to the House Ways and Means Committee for secondary approvals before being reported to the House floor.

In 2011, Republican then-Gov. Rick Snyder and the GOP-led Legislature eliminated a longstanding income tax exemption for pensions as part of a major tax code overhaul. The law includes a three-tiered system to phase in the pension tax on residents reaching retirement age.

Democratic Gov. Gretchen Whitmer called for the repeal of the pension tax during her campaign. Former state Sen. Steve Bieda, a Warren Democrat who is now the Michigan Department of Treasury's director of legislative affairs, said the department is officially neutral on the bill, but supportive of changes subject to working it through the budget process.

Whitmer is expected Tuesday to detail her first budget, including potential mention of revenue replacements to pay for the tax's repeal.

Bellino was optimistic about the state’s ability to make up for the missing tax revenue, though he noted his version of the bill may see some changes before then.

“They’ll negotiate and they’ll find some pools of money and if it wants to get done by the leaders something will happen,” he said.

House Speaker Lee Chatfield said he anticipates the bill will receive further analysis in the House Ways and Means Committee, but is in favor of the lowered tax burden for senior citizens.

To be successful, the repeal will need to be part of the state’s budgeting process, he said.

“I anticipate seeing it within the budget,” said Chatfield, R-Levering, about the governor's budget presentation next week. “But, if it’s not, it will be part of the conversation in ensuring that we can reduce the burden on our senior citizens.”

Senate Majority Leader Mike Shirkey, R-Clarklake, is open to changes but has opposed a blanket repeal of the tax, noting a “fairness issue” among taxes on those with public pensions and those with private retirement income.

“If we’re going to look at providing some tax relief to retirees in this state, we have to treat all retirement income the same when we’re looking to provide that relief,” Shirkey’s spokeswoman Amber McCann said.

Bellino’s bill would repeal the tax on public pensions and exempt private retirement income of less than $51,000 for a single retiree or less than $102,000 for a couple.

The bill has the support of the AARP, a seniors group that noted in a letter to House Tax Policy Chairwoman Lynn Afendoulis that the 2011 policy “reduced the effective value of workers’ pension benefits even as Michigan residents were facing an erosion of their retirement security in other ways.”

The Michigan Association of School Boards opposed the bill because it would cut revenue from the School Aid Fund. The Michigan League for Public Policy joined in opposition because of the fear of budget cuts, said league CEO Gilda Jacobs.

"If you don’t replace the revenue that has been coming in, we’re probably looking at budget cuts somewhere else," Jacobs said.

The National Federation of Independent Businesses was neutral on the bill, noting concerns about how the state would make up the $330 million shortfall the repeal would create.

“We’re all waiting for a budget presentation next week and I think that will provide some clarity,” NFIB state director Charles Owens told lawmakers Thursday.

Staff writer Jonathan Oosting contributed

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