James Gelios of Macomb Township was 23 years old when he decided on a career in law enforcement. His starting wage as a deputy with the Macomb County Sheriff’s Office was nowhere close to amount his friends were making in the automotive industry but he was planning for the future.
“I knew I wasn’t going to make a lot of money but the pension was good. It was something my wife and I could bank on,” said Gelios, who will be turning 69 in a few weeks.
During his career as a deputy, Gelios worked to protect and serve the people of his county including his wife, Karen and their two children, now grown and with families of their own. As a veteran he was offered assignments that might have eased his burdens but for him, being a deputy required a total commitment, which sometimes meant dropping everything he was doing, off duty, in order to assist those on duty.
After 25 years of service Gelios retired.
He was 48 and looking forward to a life of leisure. However, a year later when Michael Koehs took on the role of clerk for Macomb Township and asked Gelios to serve as his deputy clerk, he decided to return to the workforce.
It’s lucky he did.
In 2011, shortly after he started working again a new retirement pension tax was enacted by Gov. Rick Snyder, changing the income that he and his wife had planned on getting in their golden years.
“It wasn’t right,” said Gelios, who retired permanently after serving as a clerk for 14 years. “I was still working at that point so I didn’t feel it as much as other people I knew who didn’t return to work and had to pay it. I feel the seniors work all their lives and calculate what money they will have available when they retire, like I did. Then he passed this tax and robbed the seniors of any cushion they may have had.”
Others agree and now there is a bill to phase it out.
Repealing the tax
Gov. Gretchen Whitmer is supporting legislation that would eliminate the state’s so-called “pension tax” of 4.25%, enacted in 2011 under Gov. Rick Snyder to help fill a $930 million budget shortfall created by other state cuts.
The proposal would replace, on average, $1,000 a year taken from the pockets of 500,000 Michigan households by exempting public pensions and restoring deductions for private retirement income, including private-sector pensions, withdrawals from individual retirement accounts (IRAs), and the portion of a 401K account subject to an employer match.
The move is due in part to the billions in pandemic relief funds the state received from the federal government.
“In May of 2020, we were projecting a $3 billion deficit,” Whitmer said, during a roundtable discussion held in Detroit. “Today, we have a $7 billion surplus. Some of this is one-time money and some of it is ongoing money. We have to be smart about how we utilize it. This is an opportunity for us to right a wrong that has been on the books for 10 years.”
She said inflation has made things difficult for Michigan pensioners who are on a limited and fixed income, adding “we can afford to do it now and I think giving seniors relief should be our top priority right now.”
According to the Senate Fiscal Agency, the governor’s proposal, to be phased-in over four years, would have an estimated $495 million General Fund budget impact by the end of 2025.
Since 2012, the tax on Michigan pension income received across the state’s 147 state- and locally-administered public pension systems has added up to more than $5 billion, according to the Michigan State Employee Retirees Association.
What does it mean?
Beginning this year, under the governor’s proposal, Michigan pensioners, age 65 and over, born before 1958 would be able to claim 25% of their retirement income as tax-exempt.
In 2023, those 62 and older born before 1962 would be able to claim 50% of their pension income as tax-exempt and in 2024 those age 59 and older born before 1966 would be able to claim 75% of their pension income as tax-exempt.
In tax year 2025, all Michiganders with pension income, no matter their age or date of birth, would be able to claim 100% of that income as tax-exempt.
Alan C. Young, managing director of Detroit-based Alan C. Young and Associates who joined Whitmer’s roundtable discussion attended by retirees from the Detroit area, said the impact of repealing the pension tax is important if you want to make Michigan a destination state.
His public accounting firm works with thousands of retirees in Michigan and across the country.
“When you have a situation where you’re taxing pension income in Michigan, but not in other states, that becomes an issue that needs to figure itself out,” he said. “It’s important if you want to make Michigan a destination state for retirees. I’m all for putting money back in the pockets of retirees. You’re taxing them from birth to death and that’s not how we want to handle our seniors.”
In the 2019 tax, a total of 1,074,890 state individual income tax returns had $24.9 million worth of taxable pensions and annuities, according to Internal Revenue Service (IRS) data.
A majority of those pensioners reported total adjusted income of between $25,000 to $50,000. That year, a total of 1.3 million state income tax filers were age 60 and older, according to IRS data.
Young said he supports the proposal, but added there needs to be a long-term budget strategy to make sure this proposed tax cut, and the state revenue lost as a result, can be sustained even without a surplus of federal dollars.
“What’s also important is how have their fixed costs risen due to inflation?” asked Young. “They are losing money and if they can get a break wherever they can, including with the pensions, it’s a start. We need to try to give relief to our seniors. The timing is an important factor here…this law is unfair.”
Paula Cunningham, AARP Michigan director, said in a statement that the organization supports the phasing out of the state’s tax on pensions that egregiously pulled the rug out from under a large swath of Michigan retirees who planned and counted on a pension not diminished by taxation.
Michael LaBuhn, 73, of Washington Township said he always thought it was odd the way it was done.
“It depends on your age, not how much you made,” said LaBuhn, whose teaching career spanned 40 years, four of which were spent as a representative for several teacher’s unions.
“In my opinion it was one more piece of disrespect for educator workers, unionism and seniors,” he said. “They were giving more tax breaks to the big companies.”
He believes repealing the tax would be a nice step in righting a wrong.
About the tax
For decades, Michiganders with pension income were not taxed on that limited income, which averages about $24,609 per year.
That all changed in 2011 leaving many Michigan retirees feeling blindsided and short changed having worked most of their lives only to have their pension income taxed.
Before February 2011, Michigan was one of 14 states that did not tax retirees on their pensions. The state’s pension tax was part of a major rewrite of Michigan’s state tax code under Gov. Snyder. It also replaced the Michigan Business Tax with the 6% Corporate Income Tax and reduced various credits.
- Michigan retirees born before 1946, about ⅔ of all Michigan pensioners, are unaffected and whose public pensions are fully tax-exempt.
- Retirees born between 1946 and 1952 can deduct the first $20,000 of pension income for single taxpayers and $40,000 for married couples filing jointly prior to age 67. When they turn 67, they are able to claim those same exemptions against all income, regardless of the source.
- Michigan retirees born in 1953 or after, cannot deduct any retirement income until they turn 67 when they can also claim more limited $20,000- and $40,000-income tax exemptions.
In June 2011, one week after the legislation was signed into law, Snyder asked for an advisory opinion concerning the constitutionality of the pension tax from the Michigan Supreme Court. That November, in a 4-3 decision along party lines, the Michigan Supreme Court upheld the pension tax on public employee retirees born after 1945.
Even though the new law softened the impact on those born before 1946, younger seniors and pensioners were estimated by the Michigan House and Senate Fiscal Agencies to have paid $528 million more in state taxes in 2012 alone.
In Macomb County, a total of 102,234 households receive retirement income averaging $21,982 annually, according to 2019 U.S. Census Bureau data, the most recent data available.
The 139,404 Oakland County households that receive retirement income see an average of $27,865 per year while the 184,844 Wayne County retirement income households see an average of $23,897 per year.
Over the past year, eight pieces of legislation have been introduced in the State Senate and House that propose, in some form, repealing the state’s tax on pension income.
This week, while speaking to a group of retirees in Detroit, Whitmer said it’s important the state has tax policy that is fair and that doesn’t put an undue burden on Michigan seniors.
Whitmer said any legislative efforts towards phasing out the tax on pension income she views as positive, adding she’s eager to have negotiations with legislative leaders and get moving down that path.
“Obviously, the legislature is one leg of the stool and getting my signature is another,” she said.
Earlier this month, State Rep. Pat Outman (R- Six Lakes) introduced House Bill 5770 that aims to repeal the state’s tax on pension income. Under his bill, Michigan seniors would no longer pay state taxes on retirement income they have earned or saved beginning Jan. 1, 2023.
“With many seniors and retirees living on a fixed income, this bill would give them more flexibility in their budgets and more money in their pockets to live more comfortably during their golden years,” he said.
In January 2021, Sen. Tom Barrett (R-Clarklake) introduced Senate Bill 24 which also aims to repeal the pension tax.
Following the governor’s State of the State Address Jan. 26, in which she said eliminating the tax on pension income was one of her top policy priorities for 2022, Barret said he appreciated the governor’s bipartisan support to provide Michigan seniors with this overdue tax relief.
“This legislation can make an enormous difference for our seniors,” he said. “It is unfair to those on a fixed income to bear this additional burden of taxation on previously earned benefits.”
Sen. Paul Wojno (D-Center Line) has also introduced legislation, Senate Bill 0002, to repeal the tax.
On Thursday, the House Appropriations and Tax Policy Committees approved House Bill 5054, which provides a total of $1.5 billion in one-time tax relief to reduce debt and improve the finances of public employee retirement systems.
Most of the funding would go to pension plans for local governments and road commissions, with an additional $350 million to improve financing in the Michigan State Police retirement system.
Raymond James & Associates’ Lisa Stella of Bloomfield Hills has been helping seniors from Macomb and Oakland counties with their financial planning for more than 25 years and ,while none of her clients have said anything about the possibility of the repeal, it doesn’t mean they’re not concerned.
“It may be they just don’t know about it – because it’s just one of many factors that figure into their retirement plan,” Stella said.
No matter how good the plan might be, a tax repeal could not have come at a better time, she added.
“The way costs are rising even to maintain one’s purchasing power requires more money,” she said. “So, I think it’s particularly attractive now.”