LANSING (WWJ/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 on Wednesday 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.
“The right to receive one’s crude financial benefits, without those benefits being diminished, in Michigan is a fundamental right. It’s in the Michigan constitution,” said Restuccia. “There’s only a few other states which have a constitutional provision with shields crude financial benefits. It puts us in a vert small category of states.”
“So, we have elevated to right to receive one’s crude financial benefits undiminished,” he said.
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.
“When the ratifiers of the Constitution want to create a permanent constitution-based exemption they do so expressly,” said Bursch. “They did just that for property of non-profit religious organizations and the words there say that such property shall be exempt.”
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.
“If the Supreme cour trules his pension tax illegal, he automatically has an $800 million hole in his budget. Believe me, he does not want to have that because he does not want to deal with more state service cuts,” WWJ’s Lansing Bureau Chief Tim Skubick said.
“However, this thing is pending that the State Supreme Court, they took the governor’s advice and took this case early so that it did not wind its way through the regular court systems, to speed up the process,” Skubick said. “The Supreme Court will decide who is right in this very, very important legal battle.”
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 tax each person pays.
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 tax breaks and others aimed at seniors have amounted to nearly $1 billion annually over the last few years.
The exemption on Social Security and military pensions continues under the new law but other retirement will be subject to income taxes in some cases. Residents born before 1946 will 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.
Snyder 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. He wanted to tax all retirees but agreed to exempt those born before 1946.
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 also will cause them to pay more.
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.
The court dismissed after an hour and 15 minutes. It’s expected to issue a ruling later this year.
The new tax takes effect Jan. 1, and the state Treasury Department expects it to generate $330 million in the 2012 tax year.
The Associated Press contributed to this report,