AARP's "friend of the court" brief urged the Michigan Supreme Court to rule that taxing pensions violates the state constitution, but the court upheld the tax.
On May 25, 2011, Gov. Rick Snyder signed into law House Bill 4361, which eliminated Michigan state tax exemptions for pension and retirement income, phasing out the exemptions based on birthdate and income level so that retirees born later would find all exemptions gone prior to age 67, and only limited exceptions based on income after those retirees turned 67. The bill was enacted despite provisions in the Michigan constitution that specifically designate accrued benefits from state retirement and pension programs as contractual obligations of the state that cannot be diminished or impaired.
AARP joined the Michigan State Employee Retirees Association Coordinating Council and the Michigan chapter of the National Active and Retired Federal Employees Association in arguing that the new tax violated specific prohibitions in the state constitution and violated federal constitutional guarantees of equal protection.
AARP's brief tracked the explicit language in the 1963 Michigan Constitution, excerpted debate during consideration of the constitutional provision and cited precedents regarding specific groups of public sector employees whose pensions were previously imperiled. The debate emphasized over and over again the intent of the drafters to protect accrued financial benefits of the public pension plans and the contractual rights inherent in that accrual. That is, the state's constitution was amended precisely to protect the contractual rights of public sector employees who had invested in their pension plans.
By imposing new taxes on pension benefits already accrued, AARP argued, the state reduces the value of those benefits and unfairly penalizes people who already made decisions based on their expected pensions.
The court disagreed. By a vote of 4-3 the court ruled that the state constitution gave the legislature broad authority to enact taxes and that the change in tax exemptions did not constitute a prohibited diminution of benefits. Moreover, the court found that there is a rational basis for the law that insulated it from constitutional challenge on equal protection grounds. The only aspect of the law that the court struck down was the provision for tying exemptions from taxation to level of income, finding that doing so violated the state's constitutional prohibition on progressive taxation. The dissenting justices took issue with the majority and argued that the new law unequivocally diminished pension rights in direct conflict with the state constitution.
What's at Stake
The accumulation and effective management of retirement assets is a critical matter of importance for all older people. Pension plan participants need to be able to rely upon the benefits and purchasing power conferred by their earned pension benefits, in which they have in many cases invested over the course of their entire working lives. Michigan's elimination of its exemption of retirement pension income from state income taxation is, unfortunately, not a unique initiative, as other states have eyed similar measures in an effort to meet budgetary challenges, and this ruling will likely give supporters of such measures a boost.
In re. Request for Advisory Opinion Regarding Constitutionality of 2011 PA 38 was before the Michigan Supreme Court.