Michigan Legislature approves income tax relief for some retirees

Michiganders with public pensions and other, specific retirement accounts could soon see new tax breaks under a bill approved Thursday in the state Senate, and the House has approved a competing plan with key differences.

The Senate measure passed by a 23-15 vote, with three Republicans joining the 20 Senate Democrats to support it. The House bill passed 67-41. The idea underlying both bills is at the heart of Gov. Gretchen Whitmer's legislative agenda.

However, Republicans opposed to the measure have the power to ultimately prevent whichever version ends up flying from immediately taking effect. They wanted broader relief for more retirees, arguing the measures do not help enough Michigan seniors.

State Sen. Joe Bellino Jr. of Monroe was one of the Republicans who voted against the bill.

“I have long supported ending the retirement tax, but all our seniors should get this relief — not just those who worked for the government. Since Senate Bill 1 doesn’t provide relief to all our seniors, I could not support it,” Bellino said in a statement. “Whether a Michigan senior worked for the state, owned a small business, built cars on the line, or is still working, they should be treated equally. Working for state government for 30 years shouldn’t entitle a retiree to lower taxes than someone who repaired cars for the same amount of time.”

State Rep. Dale Zorn, R-Onsted, voted against House Democrats' version of the bill. He called it "convoluted" and said it would take too long to take full effect.

“The governor keeps saying she wants to repeal the retirement tax. I do too. But this proposal doesn’t cut it,” Zorn said in a statement. “This is an overly complicated measure that picks winners and losers. It waives all taxes on public pensions while seniors who spent their lives working in the private sector continue to pay.”

Zorn said he supports a plan proposed by House Republicans that he said would enable seniors 67 years and older to deduct $40,000 of all income from the state income tax, or $80,000 for couples filing jointly. The plan would further enable seniors ages 62 to 66 to deduct $20,000 of retirement income for individuals or $40,000 for joint filers. Deduction amounts would increase with inflation. He said it would take full effect for the 2023 tax year.

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What's in the bills?

The Senate bill restores a tax exemption for public pensions, which was removed in 2011 under then-Gov. Rick Snyder. But it also creates new deductions for other retirement accounts, like 401ks, IRAs and annuities.

Public pensions would be entirely exempt from state income tax. The bill allows limited exemptions on earnings from other pension and retirement accounts: up to $56,961 for single tax filers, and $133,922 for people filing jointly.

Initially, Democrats proposed the exemptions be phased in over a number of years, but amended the measure Thursday to ensure the changes would take effect for the 2023 tax year.

The House approved a very different version of a plan to exempt pensions and other incomes from taxes. The plan is phased in over four years, with older seniors able to access greater deductions under a tiered system segmented by age.

Who does it help?

Democrats note the Senate bill helps people who have public pensions, chiefly those who had them before the 2011 change and expected them to remain untaxed. Any number of jobs are eligible for these pensions, from firefighters and police officers to city administrators and superintendents.

Supporters, like Whitmer, note the change could help former rank-and-file workers save more of their money. Opponents argue the changes benefit a select few, including retired government executives with six-figure pensions.

A Senate Fiscal Analysis of the original Senate bill projected after full implementation, the lost tax revenue would likely top $500 million annually. A House Fiscal Analysis of the original House bill estimated lost tax revenue at $450 million per year after full implementation.

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What do supporters and opponents say?

The Senate measure offers immediate relief to a slew of Michigan seniors, argued Sen. Kevin Hertel, D-St. Clair Shores, the main sponsor of the Senate legislation.

"My colleagues on the other side of the aisle have said that this bill would pick losers and winners. But this bill only creates more winners: no one's taxes will go up as a result of this legislation," Hertel said.

"This bill will enable seniors to live, work and retiree with dignity in our state. It will put an average of $1,000 back into the pockets of seniors in our communities."

But Republicans argued the Senate bill would only help roughly one-third of Michigan seniors, saying most do not have eligible retirement income or continue to work.

The three Republican senators who joined their Democratic colleagues in supporting the Senate measure were Sens. John Damoose, R-Harbor Springs; Mark Huizenga, R-Walker; and Michael Webber, R-Rochester Hills.

What happens next?

Either chamber's version of the bill would need to be approved by the opposite body and signed by Whitmer to become law.

Either version could be blocked from taking immediate effect by the Senate, where a bill needs two-thirds of senators to support giving any bill immediate effect. The Senate bill did not pass the body initially by that wide a margin. If that margin holds, then the bill would likely take effect sometime in early 2024.

The Detroit Free Press contributed to this report.

This article originally appeared on The Daily Telegram: Michigan Legislature approves income tax relief for some retirees