Susan J. Demas: Will Michigan's hated pension tax survive Rick Snyder?

  Susan J. Demas

Susan J. Demas

This column ran in Dome Magazine.

Gov. Rick Snyder’s ultimate legacy will be the Flint water crisis. But as our CPA governor, he likely views his greatest accomplishment as his 2011 tax overhaul.

But you have to wonder how much of it will survive Snyder, who’s termed out of office in less than 20 months. After all, many parts of his plan, especially the “pension tax,” are unpopular.

The governor announced his tax reform shortly after taking office, to great fanfare. It was vastly complicated, as Michigan has to balance its budget every year (unlike the feds). To get there, Republicans jammed through big cuts to universities, K-12 schools and social safety net programs.

As far as Snyder’s hodgepodge tax plan went, Republicans swooned over the $1.7 billion tax cut for businesses. Actually, many people (especially accountants) favored the simpler, flat 6-percent corporate income tax over the inscrutable Michigan Business Tax –– which was living proof that bipartisan compromise isn’t an inherent good, but sometimes produces incoherent messes.

Luckily for Snyder, he didn’t have to worry about playing nice with Democrats. He was blessed with strong GOP majorities in both chambers who stood ready to help the governor –– even though he asked them for (gasp!) huge tax increases on individual ratepayers.

Yes, it was a sight to behold. Many Republican lawmakers, who had rode the ‘10 tea party wave to victory, were suddenly sounding like Democrats as they defended $1.4 billion* in annual tax hikes. That came through increasing the income tax rate; cutting the homestead property exemption and Earned Income Tax Credit; and axing big tax deductions for children, charity and college tuition.

And Democrats got their turn to finger-wag about sky-high taxes.

But the bitterest pill to swallow was getting rid of the exemption on pension income, i.e. the pension tax. Snyder initially proposed taxing everyone’s pension, making the case that it was about fairness, especially for younger workers.

While Snyder’s argument was fiscally defensible, he badly misread the politics. That was just a bridge too far for GOP lawmakers, who depend heavily on senior citizen votes.

“The governor’s probably right on the fairness issue, but I just don’t want to tax seniors, period,” Sen. Joe Hune (R-Hamburg) summed it up in February 2011.

So the compromise undercut Snyder’s fairness doctrine completely by instituting three tiers of taxation: None for those born before 1946; a partial exemption for those born between 1946 and 1952; and a much smaller exemption for those born after 1952.

In other words, those about 64 and younger got a raw deal, as usual.

The pension tax brings in $300 million each year, but it still carries an outsized, potent political kick. Democrats have been running on the issue for years. While it’s never proved decisive, the reviled “senior tax hike” does box Republicans in.

That’s why Republicans like freshman Rep. Tom Barrett of Potterville, who never had to vote on the tax, ran campaigns opposing it.

And that’s why one of the House’s newest members, Rep. Gary Howell (R-North Branch) –– just elected in February to replace disgraced ex-Rep. Todd Courser –– just introduced legislation taking aim at the hated tax. Howell’s bill would hand Baby Boomers --- who coincidentally are a big GOP constituency –– a bigger tax break.

It seems unlikely the governor would sign such legislation, but we’ve already seen some chinks in his 2011 tax reform armor. The 2015 roads plan included an income tax rollback, although it’s not clear that the state will hit the trigger in the future.

So it’s an open question if the pension tax will outlive Snyder’s tenure. Most of the leading candidates for governor (Lt. Gov. Brian Calley excluded) would probably be open to scrapping it. Democrats like former Sen. Gretchen Whitmer and U.S. Rep. Dan Kildee (D-Flint) would surely see it as a political plus. And GOP Attorney General Bill Schuette, who fought for pensioners’ rights in Detroit bankruptcy, knows a political liability when he sees one.

Of course, it all comes down to money. And while $300 million isn’t a huge chunk of the state’s $10 billion general fund, it isn’t chump change, either. And with big liabilities looming over the Flint water crisis and Detroit Public Schools’ near-insolvency, it just might not be fiscally possible for the next governor to kill the pension tax.

The bigger question, really, is if Flint, DPS and other crises mean Michigan returns to the bad old days of huge budget cuts throughout the year and government shutdowns.

If that happens, it will be the complete obliteration of our current CPA governor’s fiscal legacy. And that would truly be something.

* Corrected, 10:11 a.m.

Susan J. Demas is Publisher and Editor of Inside Michigan Politics, a nationally acclaimed, biweekly political newsletter. Her political columns can be found at SusanJDemas.com. Follow her on Twitter here.