By Roberta M. Gubbins
Legal News
Seniors concerned that the state would begin taxing their pensions filled the 6th floor Michigan Supreme Court courtroom on September 7th to hear Attorney General lawyers argue whether the new law, Public Act 38 is legal under the Michigan Constitution.
Governor Snyder, in an effort to forestall lengthy legal battles, asked the Supreme Court for an advisory opinion answering the following questions:
* Does reducing the statutory tax exemption for public pension incomes impair the pension's benefits under Article 9 sec 24 of the Michigan Constitution?
* Does determining eligibility for income-tax exemptions based on total household resources or age and resources create a graduated income tax in violation of Article 9, sec 7 of the Michigan Constitution?
* Does reducing the statutory exemption for pensions impair a contract obligation of the state?
* Does determining eligibility for income-tax exemptions based on birth date violate the equal protection clause of Michigan Constitution?
John J. Bursch, attorney for Attorney General in support of the validity of PA 38, argued that the law did not violate Art 9, section 24 of the Constitution because it does not create a permanent, irrevocable tax exemption for public pension distributions or even imply that public pensioners should not pay taxes and because there is no such right, it does not violate public pensioners' right to contract.
Arguing that the act does not create a graduated income tax since income is either taxed at a flat rate of 4.35 percent, or is exempted from taxation, Bursch was interrupted with questions from the Justices attempting to clarify the graduated tax issue. Justice Young led the questioning, followed by Justices Markman, Mary Beth Kelly, Hathaway and Zahra.
B. Eric Restuccia, attorney for Attorney General in opposition to the validity of 2011 PA 38, argued that effectively, the bill creates a graduated tax and eliminates exemptions that in some cases are based on income. Opponents also point out that there are no other tax exemptions or deductions for which eligibility is based on income.
Opponents also contend the bill violates Article 9 Sec 24 of the Constitution because it reduces the pension income that public sector employees have already earned. Under this constitutional provision, the bill's public employees can rely on a certain level of retirement income and by reducing this income; the Legislature impairs "a contractual obligation" of the state and its political subdivisions.
Justice Markman observed at the close of the arguments that, since the Attorney General's office is arguing for both the supporters and opponents of the bill, it is certain that the Attorney General's office would prevail.
Background:
Governor Rick Snyder signed into law 2011 PA 38 on May 25th; October 1st is the earliest date that any of the act's provisions will go into effect. The Act eliminates the Michigan Business Tax and replaces it with a flat corporate income tax. PA 38 also limits the prior exemption for pension income, depending on which of three age groups taxpayers fall into:
* Taxpayers who will be at least 67 years old in 2012 will keep their current pension exemptions. Public pension distributions for people in this age group will remain completely tax-exempt. Private pension retirees will have capped pension exemptions of $45,120 per single filer and $90,240 for joint filers.
* Taxpayers who will be between 60 and 66 in 2012 will have their pension exemption - whether public or private - capped at $20,000 per single filer and $40,000 per joint filer. At age 67, the pension exemption becomes a general income exemption with the same caps. But taxpayers in this group receive no pension or income exemptions if their total household resources (all income received less any net business, rental, or royalty losses) exceed $75,000 per single filer and $150,000 per joint filers.
* Taxpayers who will be 59 or younger in 2012 will have their pensions taxed, whether public or private. In place of a pension exemption, PA 38 provides that all taxpayers in this group, once they turn 67, will receive an income exemption of $20,000 per single filer and $40,000 per joint filers. As with the second group, these taxpayers are not eligible for the income exemption if their total household resources exceed $75,000 per single filer and $150,000 for joint filers.
According to the Legislature's fiscal analysis of PA 38, these changes are projected to provide $224.9 million in tax revenue for fiscal year 2011-2012 and $343.4 million for FY 2012-2013.
Published: Thu, Sep 15, 2011
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