Finley: Pension tax pandering hurts Mich.

Nolan Finley
The Detroit News

Sometimes candidates from different political parties can come up with the same really bad idea.

It happened during the 2016 presidential contest, when both Hillary Clinton and Donald Trump campaigned against free trade agreements.

And it's happening in Michigan this year. Both Republican Bill Schuette and Democrat Gretchen Whitmer are promising that if elected they will repeal the tax on pensions that was instituted by Gov. Rick Snyder and the Legislature in 2012.

The pension tax continues to be a sore spot with those looking to retire soon and lucky enough to have a defined benefit retirement plan.

That's not a large percentage of Michigan workers; roughly one in four private sector employees will retire with a pension.

But it's a significant piece of the state budget. The pension tax raises about $300 million a year.

Eliminating it would blow a hole in the budget that neither Whitmer nor Schuette has a plan for filling. The options, of course, are cutting spending elsewhere, or finding another revenue source. (That's a nice way of saying raise taxes.)

The $300 million generated by the tax is exactly equal to the increase in per-pupil funding passed by the Legislature for next year. That much money isn't easy to find.

Aside from the fiscal recklessness of repealing the tax, there's also the question of fairness.

The majority of taxpayers in Michigan won't draw a pension. They'll have to fund their retirements through other means.

Go to any McDonald's and look at the gray-headed employees bagging burgers or manning the counter. That's how they're funding their retirements, and it's all taxable.

Same goes for those who don't have a pension, but saved for their retirement through IRAs or 401(k) accounts. The earnings on those savings are also taxed.

Why should all those taxpayers who don't have a pension coming subsidize the retirements of those who do?

That's what shifting the tax burden from pensioners and onto another group of taxpayers would do.

Michigan remains one of the 38 states that don't impose the state income tax on Social Security income. And it is one of 24 states that provides significant exemptions and limits on the pension tax.

Single filers in Michigan who don't collect Social Security can deduct the first $35,000 of their retirement benefits, and a married couple can deduct a maximum of $70,000. For everyone else it's $20,000 and $40,000.  That mitigates the burden considerably, and spares most lower income retirees.

Pensions are income. And income is taxed in Michigan. As long as that's true — and I'd be all in favor or eliminating the income tax for everyone — pensioners should pay along with everyone else.

Police, fire protest potential retirement health care and pension reforms outside the Michigan Capitol on Wednesday, November 29, 2017.

Applying the income tax to pensions was not a popular decision for Snyder. It cost him a great deal of support when he ran for re-election in 2014.

But it was the fair thing to do, and it was right for the state.

The two candidates who would replace Snyder as governor see the opportunity to pick up some votes by pandering to a small segment of the electorate.

And that's more important to them than acting responsibly for all of Michigan's citizens.

That's not the kind of decision-making that is going to keep Michigan moving along a sound fiscal path.

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