Business group to Michigan Legislature: Extend tax cuts to more seniors

• The Small Business Association of Michigan proposes expansion of income tax exemption for all retirement-age seniors
• Brian Calley, president and CEO of the association, raises equity concerns about Democrats’ plans to repeal pension tax
• The proposal would not cover pension recipients as they would be eligible for unlimited exemptions under Democrats’ plan, Calley said

LANSING — Michigan Democrats are expected this week to pass a tax cut for 1 million seniors and lower-income residents, but the leader of a business group is proposing a compromise that he says would benefit more people.

Democrats hope to repeal the state’s so-called pension tax on retirement income and expand the state’s Earned Income Tax Credit for lower-income families. The Small Business Association of Michigan wants lawmakers to expand proposed retirement tax changes to cover middle-class families and retirement-age seniors who are still working.

“I think if (lawmakers) went with this proposal here, even though it’s not perfectly equitable, it comes awfully close,” Brian Calley, the association’s president and a former lieutenant governor, told reporters on Monday.

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Calley on Monday proposed the state allow all retirement-age seniors to deduct up to $65,000 from taxable income for single filers and $130,000 for joint filers — up from the current $20,000 and $40,000 for single and joint filers — regardless of their retirement status or income type, 

The proposal would cover all of “middle-class” seniors in Michigan, he said. 

According to definitions by the Pew Research Trust, the middle-class is broadly defined: anywhere with an annual income two-thirds or double the national median level, roughly $47,000 to $142,000 per year.

Calley’s proposal would allow working seniors to start claiming the exemption when they are 59.5 years old, “the age that typical private sector retirement accounts are eligible for withdrawal without penalty,” according to a one-page document the association provided to reporters.

“These seniors are no less important and no less worthy of equitable treatment as compared to those who can afford to retire,” according to the document. “We ask that working seniors be treated at least as fairly as those who retire with IRAs and 401ks.”

Calley served under former Gov. Rick Snyder, a Republican, who adopted the pension tax and other tax changes in 2011 to fill a $930 million state budget gap. Calley cast the tie-breaking vote for the tax code rewrite.

The retirement income tax is widely unpopular among seniors, and Democratic Gov. Gretchen Whitmer has promised to repeal it since she took office in 2018.

Democrats now control both chambers of the Legislature, and are working on similar plans to repeal the tax.

The Senate plan would exempt public pensions and some other types of income — such as 401(k) contributions — starting next year. Fully eliminating the tax would cost the state more than $500 million a year, and the price could rise due to the state’s projected aging population, according to a nonpartisan Senate Fiscal Agency analysis. 

The House plan would phase out the tax on “retirement or pension benefits” over the next four years and increase the percentage of income tax collection deposited to the state’s School Aid Fund. The plan would cost the state $450 million by the 2026 fiscal year, when retirement tax is fully eliminated, according to an analysis by the nonpartisan House Fiscal Agency.

Roughly 500,000 households will save an average of $1,000 if the retirement tax is repealed, Whitmer’s administration projected. 

Calley told reporters Monday the association does not have an estimate on how much its proposal would cost. 

It’s possible his proposal could gain traction among some Republicans, who have criticized the plans as too narrow, contending the proposals wouldn’t benefit working seniors and retirees who make other types of income not covered by the bills. 

The Democrats have a two-seat majority in both the House and Senate.

Democrats also plan to expand the Earned Income Tax Credit that applies to families making less than $57,000 a year, averaging savings of about $2,467 in Michigan. 

Michigan has an Earned Income Tax Credit, but it was reduced to 6 percent of the federal version from 20 percent under Snyder. Dueling plans would restore it to its original value or expand it to 30 percent, which is estimated to save roughly 700,000 people an average of $400 to $600 per year.