Extending Exemptions

In a recent appearance on the Frank Beckmann radio show where I discussed Gov. Rick Snyder's proposed business tax cut and reforms, the issue of taxing pension income arose. A number of retired government employees phoned in strenuously objecting to any income tax on their pensions.

What many listeners may not have realized is that Michigan currently provides a 100 percent income tax exemption for government retirement benefits, but the exemption is capped for benefits earned by retirees who worked in the private sector.

That this is unfair is recognized even by some liberal Democratic politicians such as former state Sen. Mickey Switalski, who introduced a bill last year to extend the 100 percent income tax exemption to pension benefits from private employers as well as government ones.

That reform will be much easier if the state enacts policies that bring about $5.7 billion in potential savings that Mackinac Center research suggests are possible by indexing government employee fringe benefits to private-sector averages. Specifically, state, local, university and K-12 employees receive benefits every year worth $5.7 billion more than those averaged by employees the private sector — and that's a conservative estimate.

Fixing this imbalance would save enough to eliminate a projected $1.8 billion spending-over-revenue state budget gap, repeal the $2.2 billion Michigan business tax and surcharge, spend an additional $1.7 billion fixing roads, save for a rainy day or ... extend to private sector retirees the same tax breaks enjoyed by those who were employed by governments. All without cutting a single government program or laying off a single employee.

Not that there isn't room for slimming government programs and payrolls. A 2003 Mackinac Center study identified 200 recommendations for saving $2 billion. Subsequent research has found many more that every year could save taxpayers additional hundreds of millions.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.