Tax Law Blog

Michigan Supreme Court Upholds Taxation of Public Pensions, But Strikes Down Graduated Income Tax

In 2011, Public Act 38 was signed into law.  Prior to Public Act 38, public pension benefits were completely deductible, private pensions were deductible up to $45,120 (for a single filer), and all taxpayers were entitled to a personal exemption of $2,500.

Public Act 38 changed that as follows:

• Persons Born Before 1946. The Act does not change such persons' current treatment of retirement or pension income. Public pensions and other sources of public retirement income (including social security benefits) will continue to be exempt from state income tax. Likewise, the current exemption applicable to private pension and other sources of private retirement income will continue ($45,120 for single filers; $90,240 for joint filers).
• Persons Born During 1946 through 1952. Such persons' deductions for: (i) public pension and retirement benefits, and (ii) private pension and retirement benefits, are limited to $20,000 for single returns ($40,000 for joint returns).  Once such persons reach age 67, the deductions are available against all income. However, as originally enacted, if such persons' total household resources exceed $75,000 ($150,000 for a joint return), no deductions were available. The deduction for social security benefits remains available.
• Persons Born After 1952. Such persons' deductions for: (i) public pension and retirement benefits, and (ii) private pension and retirement benefits, are no longer available.  However, the deduction for social security benefits remains available. When such persons reach age 67, they are eligible for a deduction of $20,000 ($40,000 for joint returns) against all types of income, although the separate deductions for social security benefits and the standard deduction are not allowed to persons who take the deduction. As originally enacted, if total household resources exceed $75,000 ($150,000 for a joint return), no deductions were available.

Also, as originally enacted, Public Act 38 phased-out certain deductions for single taxpayers with total household resources between $75,000 and $100,000, and for married couples filing joint returns with household resources between $150,000 and $200,000.

After its enactment, the Governor requested an advisory opinion regarding the Constitutionality of Public Act 38.  The Supreme Court held that reducing or eliminating the exemption for public pension income was Constitutional.  However, the Supreme Court held that determining the eligibility for income tax deductions and exemptions on the basis of total household resources created a graduated income tax in violation of the Michigan Constitution which expressly prohibits a graduated income tax.  Accordingly, the Supreme Court severed those provisions of Public Act 38, which tied entitlement to a deduction or exemption to household resources. The other provisions of Public Act 38 remain intact.

Categories: Income Tax