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Oops - look what the Michigan Constitution says about pensions

by: ScottyUrb

Sun Mar 13, 2011 at 04:08:32 AM EDT

Article IX, Sec. 24 of the Michigan Constitution (emphasis mine):

The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

Now how is Snyder's tax proposal not a diminishing of this obligation?

ScottyUrb :: Oops - look what the Michigan Constitution says about pensions
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The Likely Legal Argument
The section is intended to stop the state from reducing or eliminating contractually obligated benefits, meaning that public pensions constitute inviolable contracts. However, this does not mean that they are constitutionally exempt from the state income tax. It would be one thing if public pensions were being taxed differently than other pensions or other sources of income, but instead, pensions are being treated just like any other source of income.

Exercising the power to tax is not equivalent to "impairing" an obligation,
I haven't researched it specifically, and I imagine there might be an argument in extreme cases (such as a tax equal to 100% of the pension) but governments tax proceeds of transactions all the time without "impairing" the underlying obligation.

AG Opinion on the Matter
In addition to the Constitutional prohibition on taxing the pensions from the four state-run public pension systems, there is an Attorney General Opinion on the matter.  AG Opinion #6697 of December 18, 1991, says, in summary:


Limitation or repeal of income tax exemption for public pension benefits

Section 30(1)(f) of the Income Tax Act of 1967 which exempts retirement benefits received from a Michigan public retirement system may be prospectively limited or repealed by the Legislature pursuant to Const 1963, art 9, Sec. 1. Such a limitation or repeal would not, however, in and of itself, affect similar statutory tax exemptions presently found in four retirement statutes.

The Legislature may prospectively limit or repeal the state and local tax exemption provisions it has put in four retirement statutes as to all new members joining those systems after the effective date of such prospective legislation.

The Legislature may, without violating Const 1963, art 9, Sec. 24, limit or repeal the tax exemptions now found in four retirement statutes as to current retirees and members if it provides alternative benefits in their place that are equal to or greater than the pension benefit that would be limited or withdrawn since there would be no constitutionally cognizable impairment of the pension benefit.

What I take from this is that (1) the public pension tax exemption could be ended or modified for future members of the public pension systems, and (2) the public pension tax exemption could be ended or modified for current members of the public pension systems if an equal or greater replacement benefit were provided.

When asked about this impediment to taxing public pensions, Governor Snyder answered that he thought there was a way around it.  However, we haven't heard any detail about the method he intends to use just yet. Senator Rick Jones who opposes the pension tax, has reportedly asked for another AG Opinion on the matter.

Eliminating the public pension exemption is estimated to produce revenue of $153 million in FY 2011-12 and $232.2 million in FY 2012-13.  

Of the 50,000+ state employee retirees, over 70% have a pension of $24,000 or less; over 30% have a pension of $12,000 or less. Although newer retirees have the higher pensions, the Governor's proposal hits hardest the older and poorer retirees.

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