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143157 - In re: Request for Advisory Opinion Regarding Constitutionality of 2011 PA 38

In re: Request for Advisory Opinion Regarding Constitutionality of 2011 PA 38
 
John J. Bursch
___________________________
 
B. Eric Restuccia

Summary

​On May 25, 2011, Governor Rick Snyder signed into law Enrolled House Bill 4361, which became 2011 PA 38; October 1, 2011 is the earliest date when any of the act’s provisions will go into effect. The act eliminates the Michigan Business Tax and replaces it with a flat corporate income tax. PA 38 also limits the prior exemption for public pension income, depending on which of three age groups taxpayers fall into:
  • Taxpayers who will be at least 67 years old in 2012 will keep their current pension exemptions. Public pension distributions for people in this age group will remain completely tax-exempt. Private pension retirees will have capped pension exemptions of $45,120 per single filer and $90,240 for joint filers.
  • Taxpayers who will be between 60 and 66 in 2012 will have their pension exemption – whether public or private – capped at $20,000 per single filer and $40,000 per joint filer. At age 67, the pension exemption becomes a general income exemption with the same caps. But taxpayers in this group receive no pension or income exemptions if their total household resources (all income received less any net business, rental, or royalty losses) exceed $75,000 per single filer and $150,000 per joint filers.
  • Taxpayers who will be 59 or younger in 2012 will have their pensions taxed, whether public or private. In place of a pension exemption, PA 38 provides that all taxpayers in this group, once they turn 67, will receive an income exemption of $20,000 per single filer and $40,000 per joint filers. As with the second group, these taxpayers are not eligible for the income exemption if their total household resources exceed $75,000 per single filer and $150,000 for joint filers.

 

According to the Legislature’s fiscal analysis of PA 38, these changes are projected to provide $224.9 million in tax revenue for Fiscal Year 2011-2012 and $343.4 million for FY 2012-2013.
 
On June 15, 2011, the Michigan Supreme Court granted the Governor’s request for an advisory opinion regarding the constitutionality of these and related provisions. Article 3, § 8 of the Michigan Constitution provides that either the Governor or the Legislature may request the Supreme Court’s opinion “on important questions of law … as to the constitutionality of legislation after it has been enacted into law but before its effective date.”
 
The Governor asked the Court to address the following questions:

1. Does reducing or eliminating the statutory tax exemption for public-pension incomes impair accrued financial benefits of a “pension plan [or] retirement system of the state [or] its political subdivisions” under article 9, § 24 of the Michigan Constitution?
2. Does reducing or eliminating the statutory tax exemption for pension incomes impair a contract obligation in violation of article 1, § 10 of the Michigan Constitution, or of article 1, § 10 of the United States Constitution?
3. Does determining eligibility for income-tax exemptions based on total household resources, or age and total household resources, create a graduated income tax in violation of article 9, § 7 of the Michigan Constitution?
4. Does determining eligibility for income-tax exemptions based on date of birth violate equal protection of the law under article 1, § 2 of the Michigan Constitution, or under the 14th Amendment to the United States Constitution?
 
Opponents of PA 38 argue that
  • The bill violates Article 9, §24 of the state Constitution because it reduces the pension income that public sector employees have already earned. Under this constitutional provision, the bill’s opponents contend, public employees can rely on a certain level of retirement income; by reducing this income, the Legislature diminishes or impairs “a contractual obligation” of the state and its political subdivisions.
  • Similarly, the bill violates public employees’ constitutional right against impairment of contract (Article 1, § 10 of the state Constitution and Article 1, §10(1) of the U.S. Constitution). In effect, the argument goes, the state has gone back on its agreement with public employees by reducing their income after they have performed the work.
  • PA 38 also violates Article 9, § 7 of the Michigan Constitution because it effectively creates a graduated tax – and eliminates exemptions in some cases – based on income levels, opponents assert. They point out that there are no other tax exemptions or deductions in Michigan for which eligibility is based on income.
  • The bill’s opponents also argue that basing tax exemptions on age and marital status violates equal protection of the laws. (Marital status is a factor because a pensioner who is otherwise ineligible for a full exemption becomes eligible if his or her spouse is born before 1946.)

 

Supporters of PA 38 argue that
  • Article 9, §24 of the state Constitution does not create a permanent, irrevocable tax exemption for public pension distributions, or even imply that public pensioners should not pay taxes, the bill’s supporters contend. When the ratifiers of Michigan’s 1963 Constitution wanted to create a permanent tax exemption, they did so expressly – for example, for non-profit religious and educational organizations (Article 9, §4).
  • Because there is no right to a permanent exemption for pension distributions, PA 38 does not violate public pensioners’ right to contract. Even if public employees had a contract right to a tax exemption on public pension distributions, PA 38 does not alter the right to receive the pension or basic benefits, supporters maintain.
  • PA 38 does not create a graduated income tax; income is either taxed at a flat rate of 4.35 percent, or is exempted from taxation. The use of exemptions does not convert a flat tax into a graduated income tax. “Total household resources” includes items that Michigan and the federal government ordinarily exclude from gross income, so PA 38’s exemptions are not based on the taxpayer’s income level, the bill’s supporters argue.
  • Because age is not a “suspect classification” for equal protection analysis, the “rational basis” test applies. Supporters argue that the lines drawn by the Legislature are rationally related to a legitimate governmental interest (protecting older retirees who are less able to adjust to tax changes that affect their income) and the bill is narrowly drafted to achieve that goal.