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Michigan supreme court will hear arguments on pension tax

On Wednesday the Michigan Supreme Court will hear arguments on the constitutionality of Gov. Rick Snyder’s move to impose the income tax on the pensions of the state’s public employees.

The new tax is expected to generate $343 million a year and is part of a major tax overhaul that includes $1.6 billion in tax cuts for businesses.

The Michigan State Employee Retirees Association claims that charging income tax on their pensions violates a state constitution prohibition on diminishing pension benefits. The Snyder administration says that excluding retired state workers from income tax is unfair and economically unsustainable.

In June the state’s high court granted the governor’s request that it consider the legal questions raised by the new tax, including whether the gradual rollout of the tax, which protects current retirees from any new taxes, is a form of age-based discrimination.

Peter Luke reports that the Court — which has four Republicans and three Democrats — asked Attorney General Bill Schuette to prepare arguments on both sides of the questions.

On pro side on the first question, Schuette’s office argues the state is constitutionally barred from surrendering its taxing authority unless expressly stated elsewhere, as is in the case of property tax exemptions for churches and schools. There is no specific tax exemption in the constitution for pensions.

And there is nothing in the constitution’s pension provision (Article 9, section 24) that “purports to provide an irrevocable tax exemption for public pension distributions, or that even implies public pensioners are forever free from having to pay for state services,” the brief argues.

Not so, says the other team of lawyers. They argue the constitution guarantees “that public employees can rely on a specific level of retirement benefits for work that they have already performed, and that the Legislature cannot reduce this level after the rights have accrued.”

“By eliminating these protections and applying Michigan’s income tax to the pension benefits that have already accrued, the Legislature is reducing the pension income for public employees in violation of Article 9, section 24,” they argue.

On the question of using age to determine which retirees will pay the new tax the AG’s office says:

This graduated tax recognizes “the burden on older retirees with fixed incomes who are unable to plan for changes in the tax laws that would increase their tax obligation. For those whose retirement is further into the future, the opportunity to plan ahead and redeploy resources is greater.”

On the other side, they argue that age-based distinctions are impermissible:

“… the classification of public pensions based on date of birth does not spread the sacrifice equally among those who are similarly situated. Instead, it treats similarly situated pensioners who have reached the same age differently and gives special status to a select group of pensioners born in 1946 or after who happen to be married to someone born before 1946. Thus, contrary to the State’s asserted goal, the classification is fundamentally unfair.”

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