Tax season in an election year creates an interesting dynamic, including various proposals for how to better collect and spend Michigan’s taxpayer dollars.
These discussions are a result of the once-in-a-generation surplus at the state treasury with tax dollars from the federal and state level filling the coffers. How should Michigan spend these hard-earned dollars? New programs? Returning the dollars to taxpayers?
One of the main topics of discussion is eliminating the so-called “pension tax” — which some have alleged is an added tax on the pockets of retired Michigan residents.
But there is a major problem with that discussion: Michigan doesn’t have a pension tax — it has an income tax.
Before being overhauled in 2011, Michigan’s tax code was riddled with many special deals for select businesses and individuals so that they could avoid the income tax. One of these special deals was especially targeted to special interests: employees of government and legacy big businesses that had pensions.
The difference between different retirees: pensioners didn’t pay taxes on their pension income, while retirees from small business paid tax on their retirement savings income.
Rather than return to an unfair system that rewards political allies, the governor and Legislature should defend a tax system that is as low as possible, as broad as possible and as simple as possible. At the same time, the Legislature and governor should protect the pensions of the hardworking police officers, firefighters, teachers and others who have underfunded pensions across our state by funding these accounts.
The situation in Lansing right now is one of surplus and excess. The last two years have seen a significant deluge of federal dollars and unexpected sales tax revenue. This is a recipe for temptation of large, new programs that once created will stick around long after this generational surplus is depleted. New programs that would cost our children, and their children down the road.
It would be a crushing mistake to use this money to create future obligations so that our kids would have to pay twice — once to repay the debt and a second to sustain new government spending.
Therefore, these one-time resources should fund transformational change — things that can be seen and felt in 10 years but won’t require any more funding in 10 months. Instead, these billions of dollars should be used to protect pensions and relieve the burden of these past promises from our kids’ future. While there are strings tied to federal dollars, the state has some $3 billion in one-time and surplus money available for any purpose Lansing chooses. By depositing these state surpluses into state, school and local pension funds the Legislature can truly help retirees by protecting their pensions. These deposits are not just funding obligations, they are investments whose interest compounds making the future impact exponentially bigger. Therefore, this will dramatically relieve the burden from our kids and grandkids.
We learned as a state during the Detroit bankruptcy the danger of not funding pensions, and the damaging effects it can have. Retirees there had their benefits cut. Because the state’s cities are subsidiaries of the state there was real risk that these obligations were those of the state, so taxpayers from across the state had to chip into the Detroit bankruptcy settlement.
By rejecting special tax deals, investing in pension funds and relieving future burdens the Legislature and governor can protect today’s retirees, Michigan’s workers and build a bright future for our kids and grandkids.
Jase Bolger served as speaker of the Michigan House from 2011-14. He currently serves as the policy adviser for the West Michigan Policy Forum.
This piece originally ran as an op-ed in Crain’s Detroit Business on April 15, 2022.
