In May 2011, Michigan Governor Rick Snyder signed Public Act 38 of 2011 (“P.A. 38) and a sequence of other laws that made significant changes to Michigan’s Individual Income Tax provisions. These changes eliminated various credits and subtractions, modified the tax rate effective January 1, 2013, limited retirement income exemptions and changed the apportionment formula applicable to business income. Snyder asked the Michigan Supreme to review the legality of this Act, in particular the changes affecting exemptions on certain pension income.
On November 18, 2011, the Michigan Supreme Court issued its Advisory opinion that it would uphold the new changes. The court ruled 4-3 stating the reduction or elimination of the statutory exemption for public pension incomes did not violate the constitution. The court also said that determining eligibility for income tax exemptions on the basis of date of birth does not violate the constitution.
“If the ratifiers of the Constitution had intended to limit the Legislature’s authority to tax pensions in the same manner as all other forms of income, they would have expressly said so,” Justice Stephen Markman wrote.
However the Court also ruled that aspects of P.A. 38 violated Michigan’s constitutional prohibition against a graduated income tax. The Michigan Constitution Article 9, section 7 provides, “No income tax graduated as to rate or base shall be imposed by the state on any of its subdivisions.” The first provision the Court found in violation of this section phased out personal exemption for single returns with income between $75,000 and $100,000 and joint returns with income between $150,000 and $200,000. The Court determined that the unconstitutional aspects could be removed from otherwise legal P.A. 38.
Snyder stated “I’m pleased by today’s ruling from the Michigan Supreme Court that the removal of the income tax exemption for public pensions is constitutional. We appreciate the court’s willingness and work to review this critical issue on an expedited basis.”
Chief Justice Robert Young Jr., along with Justices Mary Beth Kelly and Brian Zahra, joined Markman in the majority opinion.
Justices Michael Cavanagh and Marilyn Kelly dissented in part and concurred in part. Justice Diane Hathaway dissented, although she agreed the income-based criteria for determining tax liability created a graduated income tax.