LANSING – The first shockwaves already are emanating from Gov. Rick Snyder’s expected budget proposal for the 2011-12 fiscal year with sources telling Gongwer News Service that Snyder plans a 15 percent cut in aid to public universities and a cut of about $200 million in revenue sharing to local governments.
Sources also told Gongwer that Snyder will propose ending the extra break senior citizens can claim on the Homestead Property Tax Credit as well as reducing the number of all taxpayers eligible for it.
Snyder also will propose privatizing some operations in the Department of Corrections. The exact scope could not be confirmed, but at least several major functions of the department would be privatized.
And sources confirmed that Snyder would make a dramatic proposal to eliminate the income tax exemption not only for private pensions, but also tax for the first time pensions from public employment. Since the state enacted an income tax in 1967, it has not taxed pensions from those employed by the federal, state or local governments. Social security would not be taxed.
In an interview with Gongwer on Wednesday shortly after he took a walk-through of the Senate Hearing Room in the Boji Tower where he will deliver his budget and tax plan, Snyder did not confirm any specifics about his proposals, but made clear considerable sacrifice would be asked.
“It’s a total solution, to get Michigan looking forward. The challenge we’ve had is we’ve had a backward-looking system for a long time on our budget system, our tax system,” he said when asked about the huge public reaction reports of his plan to tax pensions was getting. “And it’s time for a clean sheet. It’s time for an exciting future. And this helps set the groundwork for that. And as part of that process, there will be challenges. It’s a shared sacrifice model, and many people will be asked to contribute something short-term, but it’s to really set something exciting for the long-term.”
Already leading anti-tax activists were sounding the alarm. Leading tea party organizer Wendy Day of Common Sense in Government posted on her Facebook page, “The governor wants to tax pensions. We are losing our young people as they move out of state, do we want to lose our Seniors too? NO NEW TAXES!” Former Rep. Leon Drolet, the head of the Michigan Taxpayers Alliance, said if Snyder actually proposes taxing pensions, it would be “politically, the WORST plan in the history of Lansing!”
Rep. Richard LeBlanc (D-Westland) said the news of Snyder’s proposal on pensions had prompted constituents to inundate his office with phone calls, emails and so many faxes his fax machine ran out of toner.
Asked how he would persuade the Legislature, with its strong anti-tax Republican majorities in the House and Senate, to pass anything that could be perceived as a tax increase, Snyder said, “One thing I’ve already said is there is no net tax increase here. It’s actually a tax reduction overall if you look at the numbers, and that’s important because people are having a tough economic time in our state, and we need to be more efficient in government. It’s a chance to really reform things though to create a fair, simple and efficient tax system.”
Snyder already had proposed replacing the Michigan Business Tax with a 6 percent corporate income tax, a move that would cut $1.5 billion.
The top leaders in the Legislature – House Speaker Jase Bolger (R-Marshall) and Senate Majority Leader Randy Richardville (R-Monroe) – said they are open to the governor’s plans.
“I commend the governor for taking on a tough issue, not being afraid to roll out a plan, but this is his day, this is his budget, it’s his time to throw out his plan,” Richardville said, discussing the pension proposal. “There’s nothing dead on arrival. … There are individual pieces I like, individual pieces that I don’t, but it’s important to try and weigh the whole proposal together and then take a couple of pretty big caucuses, both over here and in the House, to bring this debate public and talk about it out in front of everybody.”
Bolger said the governor is seeking a comprehensive approach to the budget and removing the pension income tax exemption would be discussed as part of that approach.
He said many grandparents are tired of seeing their grandchildren leave the state and Mr. Snyder is trying to create an environment where those people stay in here. Bolger pointed out Social Security benefits would not be taxed under the governor’s plan.
In an interview on WJR-AM, Rep. Chuck Moss (R-Birmingham), the House Appropriations Committee chair, said he’s not “going to take this off the table no matter how controversial it is.”
Moss said Snyder wants to cut business taxes and the pension component is part of the “shared sacrifice.” He said people have forgotten what it’s like to succeed in Michigan and Snyder’s budget and tax presentation is aimed at getting the economic engine going again so that everyone benefits.
“It’s going to be a very tough argument, but it won’t be the only one,” Moss said.
Snyder officials briefed the chairs of the Appropriations and tax committees Wednesday on their plans.
House Minority Leader Richard Hammel (D-Mount Morris Township) said he was holding off on commenting since it’s unclear how much of what has been leaked or rumored in the news media will really be a part of Snyder’s budget.
In the past, the Michigan Constitution’s language on pensions has led some to say taxing public pensions would be illegal: “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.”
Sources said the administration believes case law will back them on taxing public pensions, however. How much money that would raise was not immediately clear, but assuming all retirees from the systems are Michigan residents (they are not) and the effective average tax rate has not changed substantially from 2008, when it was 2.24 percent, taxing public pensions would yield another $128.8 million based on U.S. Census figures that show state and local pension systems paid out $5.75 billion.
Eliminating the income tax exemption on private pensions – $45,120 for single filers and $90,240 for married couples – would mean an additional $725 million in revenue for the state, according to the House Fiscal Agency.
Currently, the Homestead Property Tax Credit allows those 65 and older, who make less than $82,000 a year, to claim on their state income tax form 100 percent of the amount by which their property taxes exceed 3.5 percent of household income, up to a maximum of $1,200. Those under 65 can claim just 60 percent. Snyder’s proposal would bring everyone to the same percentage although whether that would be 60 percent or another number was not clear. Sources indicated Snyder will move to lower the maximum income individuals can earn and be eligible for the credit.
The extra break for seniors means $320 million in reduced revenue for the state, according to a June paper from the House Fiscal Agency.
AARP Michigan spokesperson Mark Hornbeck said the elderly are willing to be a part of the solution, but not bear all the pain.
“We’re looking for a balance of burden-sharing,” he said. “If he’s only looking at putting in a new tax on pensions and not affecting any other groups’ taxes in this thing, then obviously that’s not something we can support.”
The exact nature of the higher education cut was unclear on whether the 15 percent cut would apply to each of the universities or whether there might be some varying amounts among the 15 schools.
On the revenue sharing front, cities, villages and townships get $633 million constitutional revenue sharing payments, and that is untouchable. Those governments
