Michigan no longer would boast the nation's most generous tax breaks for seniors if a compromise plan to tax retirement income announced Tuesday becomes law.
Republican Gov. Rick Snyder had wanted to tax all retirement income the same as normal income to raise $900 million to help pay for a sweeping business tax cut, but many lawmakers balked after seniors made their displeasure clear. The compromise reached with Republican lawmakers would exempt seniors over age 66 from the tax.
More than a thousand angry seniors protested at the Capitol a month ago. Others told lawmakers during a recent legislative recess that the taxes would cost them several hundred to several thousand dollars a year, a hardship at a time when health care costs have gone up and pension or Social Security increases haven't kept up with rising expenses.
Top Republican leaders joined Snyder in announcing the compromise. Although neither Senate Majority Leader Randy Richardville nor House Speaker Jase Bolger promised the votes were there for the revised plan, both said it was likely the two chambers' Republican majorities would pass the bills.
Michigan currently 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 generous tax breaks cost the state nearly $1 billion a year in lost revenue.
Snyder has argued that 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.
AARP Michigan, however, says it opposes any plan that increases taxes on seniors to pay for a business tax cut, especially if other services are cut that contribute to residents' quality of life. Spokesman Mark Hornbeck said the new plan may involve different numbers, but it does the same thing as the original.
Under the compromise, seniors who will be 67 by Jan. 1 would continue to get the same tax breaks they do now. Those who will be 60 to 66 by Jan. 1 would see some of their retirement income exempted from the tax. The ceiling would be $20,000 for single filers and $40,000 for joint filers and include money from public and private pensions, 401(k)s and IRAs.
Anyone born after 1952 would have all their retirement income except Social Security taxed the same as other income, but Michigan's income tax rate would drop from 4.35 percent to 4.25 percent on Jan. 1, 2013, under the agreement.
Social Security benefits and military pensions would not be taxed. When people in the second and third groups turn 67, they would receive a senior tax exemption of $20,000 for a single filer and $40,000 for joint filers, regardless of whether the money came from retirement income or a current job.
The revised proposal increases the percentage low-income senior homeowners and renters can claim for the homestead tax credit. But fewer seniors at the higher end of the tax brackets would qualify for the credit, which would increase the amount they pay in income taxes.
Snyder, knowing he wasn't going to get the votes for his original proposal, said the compromise "would create a great transitional plan."
Michigan would move down to eighth nationally in tax breaks for seniors if the new plan's adopted. It would raise about $300 million, about $600 million less than Snyder's original proposal and not nearly enough to make up for a $1.7 billion cut in business taxes he also wants lawmakers to adopt.
He proposed making up the gap with a combination of about $150 million in budget cuts and more than $400 million in tax changes.
Democratic legislative leaders have opposed taxing retirement income. They issued a sharply worded response Tuesday calling the revised plan "nothing but a bait-and-switch that offers little relief in exchange for yet another tax increase on residents."
The new deal, since it raises less money from income taxes than he wanted, makes it even less likely that Snyder will back away from his plans to eliminate the state Earned Income Tax Credit that gives low-income working families an average $400-a-year tax credit.
Thousands are expected to protest that policy, public education cuts and other Snyder initiatives at a Capitol rally Wednesday afternoon.