By Kathy Barks Hoffman
Associated Press
LANSING (AP) — Scores of seniors upset that the state wants to tax some of their public pensions for the first time packed into the Michigan Supreme Court last week as lawyers argued whether the new charge is legal.
“By imposing an income tax on public employees ... the state is violating the public trust,” said assistant attorney general B. Eric Restuccia in arguing the tax should be struck down.
Not so, said John Bursch, the assistant attorney general arguing to keep the tax.
“This isn’t a new concept,” he said, arguing that the state never gave up its right to tax pensions when protection for public pensions was written into Michigan’s constitution.
The case is a major test of sweeping tax changes put in place earlier this year by Republican Gov. Rick Snyder.
He wants a Supreme Court advisory opinion that would effectively pre-empt any court challenge on the law filed by opponents such as public employee unions, who say the state constitution protects their pensions from being taxed.
Opponents say the tax would reduce the pension income public sector employees have already earned, which violates the state constitution.
They also say the tax would violate public workers’ constitutional right to not have their contracts impaired and creates a graduated income tax — also banned in the state constitution — by taxing retirees differently based on their income level.
Michigan currently taxes income at a flat rate of 4.35 percent, but exemptions and deductions for children, those over age 65 and other factors affect how much each person pays.
Under the law, residents born before 1946 would continue to get the same tax breaks they do now, but younger retirees would have some retirement income taxed, depending on when they were born.
The seven justices — four Republicans and three Democrats — debated with attorneys presenting oral arguments whether the new tax creates a graduated income tax.
They also questioned whether the tax violates the state constitution by impinging on promised pension benefits, or whether there’s no protection from such a tax.
Wednesday’s hearing lasted just over an hour. Lt. Gov. Brian Calley, who attended the hearing at the Michigan Hall of Justice, said he hopes the court issues a ruling before the tax takes effect Jan. 1.
The state Treasury Department expects the new law to generate hundreds of millions of dollars in 2012 and even more — $330 million — when 2012 taxes are collected in 2013.
If the justices strike down the law, the state would have to find another way to fill the hole, Calley said.
It’s possible justices may strike down a portion of the law — such as the part taxing retirees at different levels based on their income — but keep the overall tax in place, he said.
Snyder has said it’s not fair that a retired couple making about $100,000 a year pays no income tax while other Michigan residents pay the tax on virtually all their
income. He says the system has pushed too much of the tax burden onto younger taxpayers.
“It’s very important that we treat citizens the same, regardless of your source of income,” Calley told reporters after the hearing.
AARP Michigan, an advocacy group for seniors, estimates retirees will pay $538 million more annually under the new law once they pay taxes on pensions and lose special exemptions for those ages 65 and over and for interest paid to seniors.
Many higher income retirees also may fail to qualify for an income tax credit on their property taxes because the credit will be phased out at $50,000 rather than $82,650, which will cause them to pay more.
The senior advocacy group had many of its members in the courtroom Wednesday. Afterward, AARP Michigan President Eric Schneidewind said he feels good about what the justices might decide.
“I’m extremely encouraged by the questions that were asked because I think they point out a number of the structural flaws in the law,” he said.
Joe Hoffman, a 64-year-old retired state accountant, was outside the Hall of Justice more than an hour before the hearing started collecting signatures to recall Snyder.
He said he and his wife, a registered nurse and community college teacher, don’t mind paying their fair share of taxes, but object to paying more so Snyder can give businesses a $1.8 billion tax break.
“He’s basically moved the tax burden from the rich to the poor and middle class,” said Hoffman, who also opposes Snyder’s moves to cut money for public schools and
local governments, and to give broad powers to state-appointed financial managers.
The state now exempts all Social Security and public pension benefits from income taxes, as well as up to $45,120 a year for a single return and $90,240 on a joint return in private retirement and pension benefits.
The cap increases annually with inflation. Those tax breaks and others have amounted to a nearly $1 billion annual savings for seniors over the last few years.
The exemption on Social Security and military pensions continues under the new law.
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