Sept. 3 (Bloomberg) -- Michigan Governor Rick Snyder’s 2011 tax increase on retirement income from pensions is haunting the Republican as he runs for a second term in a graying state still recovering from the recession.
Polls have shown Snyder, 56, in a dead heat with Democratic challenger Mark Schauer, 52, a former state legislator and congressman who’s hammering Snyder for hurting pensioners while cutting business taxes by $1.4 billion.
“I’m very sorry I voted for Mr. Snyder,” said Rosalind Weber, 67, a retired state worker from Ionia who calls herself an independent. “I won’t vote for him again. I didn’t like what he did with the taxes.”
Snyder bucked a decades-old trend among states of reducing taxes on retirees. While other issues are stirring the race -- Michigan’s 7.7 percent July unemployment rate remained above a 6.2 percent U.S. average -- the pension tax is driving a Democratic drumbeat for change in Lansing, where Republicans control all three branches of government.
Until Snyder’s changes took effect, Michigan had exempted most pension payments from the income tax, now at 4.25 percent. He created a three-tier system for retirees born before 1946, after 1952 and those in between. Members of the youngest group were hit hardest; instead of being allowed to exempt $47,309 in retirement income, they’re now taxed fully until age 67. Then, they get a $20,000 exemption.
The oldest couples can exempt all public-pension income and as much as $94,618 from private retirement plans. Michigan doesn’t tax Social Security benefits.
The changes cost retirees an estimated $350 million more in taxes in 2013, according to the House Fiscal Agency.
A television advertisement in Michigan sponsored by the Washington-based Democratic Governors Association shows a retiree complaining that his pension was taxed while the business burden was cut. Even Republican candidates not in the legislature when it passed the measure are fair game, said Josh Pugh, a spokesman for the Michigan Democratic Party.
“No question, the Republican Party is going to own a tax on seniors who are living on a fixed income,” Pugh said.
Snyder’s camp sees it differently. The governor didn’t raise pension taxes; he eliminated an unfair exemption, said his spokeswoman, Sara Wurfel. It wasn’t right to give retirees in their 50s a pass on income taxes while older and younger workers paid, she said.
“The governor does not do anything based on the politics of a decision,” Wurfel said. “He has tackled some issues that were unresolved for decades.”
She said Michigan is the eighth-most-generous state to retirees among the 42 with income taxes, citing a Michigan Treasury Department analysis.
Snyder, a former venture capitalist and computer company executive, nurtures an image of an iconoclast who avoids partisan battles. Still, he infuriated Democrats in 2012 by supporting a so-called right-to-work law opposed by unions and tighter restrictions on abortion clinics. He miffed Republicans when he expanded Medicaid coverage.
Snyder’s “Comeback Kid” campaign theme weaves stories of economic resurrection in a state whose unemployment led the nation for 45 straight months from May 2006. Michigan’s economy continued to improve during May, June and July with strong auto sales, according to Comerica Bank’s Aug. 25 economic index.
Taxing pensions is a perilous, though rational, move, said Elizabeth McNichol, senior fellow at the Washington-based Center for Budget and Policy Priorities, a fiscal-research group aligned with Democrats. States began exempting retirement income from taxes 40 years ago when a larger percentage of seniors were poor. Now, retirees are better off, and a growing population of them requires state services, McNichol said in an interview.
“The question is why we treat one kind of income differently from others,” McNichol said. “We sort of put it on a pedestal.”
Michigan’s median age jumped to 39 from 35.5 from 2000 to 2010, according to the U.S. Census. The number of residents 65 and older increased by about 12 percent in that period.
The average 2011 federally adjusted gross income for tax filers 65 and older was $46,027, compared with $51,331 for those under 65, according to the state treasury department.
Five states with income taxes exclude public or private pensions -- Alabama, Hawaii, Illinois, Mississippi and Pennsylvania -- according to a 2010 report by the National Conference of State Legislatures. Kentucky taxes only pension income above $41,100 for most retirees, the most generous exemption among states.
A proposal by Kentucky Governor Steve Beshear this year to increase pension taxes fizzled amid election politics, said Jason Bailey, director of the nonpartisan Kentucky Center for Economic Policy, which is in Berea. It was part of a sweeping plan to modify state taxes.
A February report by the group said the state loses several hundred million dollars annually in revenue through generous exemptions on retirement income.
“With an aging Baby Boomer population, it’s going to be more of a problem when we exempt huge amounts of their income,” Bailey said in an interview. “We need to do it in a progressive way. Not doing it, from a policy perspective, is very harmful.”
The impact of taxes on retirees has been debated among economists. A May report by the Center for Budget and Policy Priorities concluded that taxes had little impact on where people choose to live. Jobs, housing costs, family matters and warmer climates are more likely reasons why people migrate from state to state, according to the study.
A rebuttal by the American Legislative Exchange Council, a corporate-funded group, said taxes do influence businesses and individuals. Lower taxes promote economic growth, which in turn attracts more people seeking jobs, the report said.
Michigan seniors are angered by a combination of Snyder-led tax changes, including the pension rules and reduced property credits, said Mark Hornbeck, spokesman for AARP Michigan, based in Lansing.
“Some thought the tradeoff for a lower business tax was OK,” Hornbeck said. “Most of the feedback we got was that the pension tax was not fair.”
He said AARP, formerly the American Association of Retired Persons, lobbied to reduce the tax increase. AARP doesn’t endorse candidates, he said.
Pension taxes probably won’t decide the race for governor, “but stranger things have happened,” said Bill Ballenger, founder of the Lansing-based newsletter, Inside Michigan Politics.
“How often to Democrats have a chance to campaign against Republicans on taxes?” Ballenger said in an interview. “Snyder gave them a gift.”
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