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A Better Partnership
November 21, 2011

MSC Opinion: Legislature may tax public pensioners

The Michigan Supreme Court issued its highly-anticipated opinion on the public pensions tax on Friday, holding that the Legislature may take away tax exemptions for retired state workers' pensions without running afoul of the state constitution. That opinion can be reviewed here.

In a 51-page opinion authored by Justice Markman and signed on to by Chief Justice Young and Justices Kelly and Zahra, the Court held that there was no prohibition in the state constitution to 2011 PA 38/MCL 206.30, which withdraws tax exemptions and deductions for public pension benefits.

The entire Court agreed that there was no constitutional problem with deciding which retirees would pay taxes based on age, and agreed that the only unconstitutional provisions were those which had the effect of creating a graduated income tax. In that part of the law, the Legislature attempted to limit tax benefits to retirees earning more than $75,000 per year, which, the Court concluded, is not allowed under Michigan's Constitution. The majority also held that the struck-down graduated-income portion of the law could be severed, saving the remainder of the law.

That last bit is where the majority parted ways with Justice Hathaway. She dissented, concluding that the majority's remedy for the graduated income tax problem "redrafts a section of this act to provide tax exemptions and deductions that the Legislature clearly did not intend." She would instead send it back to the Legislature to fix the statute with its own remedy, essentially striking down the entire law.

Justice Cavanagh also dissented, noting that he believes that the law does unconstitutionally impair the right to an accrued benefit for those pension benefits which accrued before January 1, 2012.

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