MI Supreme Court Upholds Taxation of Public Pensions and ...

  

 Email Article  

Tweet  

  

... Strikes Down Use of Income Levels for Income Tax Exemptions and Deductions

If you attended a recent series of seminars offered by the MACPA where I spoke, we discussed the governor's request of Michigan's Supreme Court to offer an advisory opinion on recently enacted legislation concerning Michigan's individual income tax on these three issues:

1. Tax on pension income of public sector employees would reduce pension benefits earned.  If so, does it violate the Michigan Constitution?
   
   
2. Tax on pension income would be based on age, pension benefits would be taxed differently, and does this violate the Michigan Constitution?
   
   
3. Does the phase-out of personal exemptions by income create a graduated income tax (graduated tax is unconstitutional in Michigan)?

Michigan's Supreme Court Advisory Opinion Concludes:

1. The Michigan Court of Appeals has held that taxing public pensions does not violate the Michigan Constitution.
   
   
2. The eligibility for an income tax exemption on pension income on the basis of a taxpayer's date of birth does not violate the equal protection clauses of the U.S. or Michigan Constitution.
   
   
3. The court found the portion of the legislation that determines eligibility for income tax exemptions and deductions on the basis of a taxpayer's total household resources creates a graduated income tax in violation of the Michigan constitution.
   
   
4. The court severed the portions of the act that are unconstitutional from the remainder of the act, which it held to be constitutional with respect to all the issues raised.

Use of household income to determine eligibility to exemptions and deductions unconstitutional. The court found that determining eligibility for income tax exemptions on the basis of total household resources as set forth in Mich. Comp. Laws Ann. § 206.30(7) and Mich. Comp. Laws Ann. § 206.30(9) creates a graduated income tax in violation of Mich. Constitution § 7. That provision provides: “No income tax graduated as to rate or base shall be imposed by the state or any of its subdivisions.”

Mich. Comp. Laws Ann. § 206.30(7) conditions a taxpayer's entitlement to the personal exemption on his or her income. The phase-out of the personal exemption in the statute based on the taxpayer's total household resources creates an income tax graduated as to base because entitlement to the exemption—and the extent of the entitlement, which reduces the taxpayer's base—is entirely dependent on the taxpayer's income level. To the extent that Mich. Comp. Laws Ann. § 206.30(7) conditions a taxpayer's entitlement to the personal exemption on his or her income, it is an income tax graduated as to base and violates Mich. Constitution § 7.

Mich. Comp. Laws Ann. § 206.30(9) conditions a taxpayer's entitlement to the $20,000 pension income deduction for a single return or $40,000 deduction for a joint return. If a taxpayer's income is $75,000 or less for a single return or $150,000 or less for a joint return, the taxpayer may be entitled to the $20,000/$40,000 deduction. However, if the taxpayer's income exceeds $75,000 for a single return or $150,000 for a joint return, the taxpayer is not entitled to the $20,000/$40,000 deduction. The court held that this $65,000/$150,000 income limitation creates an income tax graduated as to base because entitlement to the $20,000/$40,000 deduction, which reduces a taxpayer's base, is entirely a function of the taxpayer's income level. To the extent that Mich. Comp. Laws Ann. § 206.30(9) conditions a taxpayer's entitlement to the $20,000/$40,000 deduction, it is an income tax graduated as to base and violates Mich. Constitution § 7.

Severability. The court held that the portions of L. 2011 P.A. 38 that are unconstitutional can be severed from the remainder of the act, which is constitutional with respect to all the issues raised. Severing these unconstitutional provisions is not inconsistent with the manifest intent of the legislature and the remainder of the act can be given effect without the invalid portions.