Tax breaks cost MI; but likely to stay

LANSING, Mich. (AP) - Every time a Michigan resident begins collecting a pension or turns 65, the nation's most generous tax breaks for seniors kick in.

That special treatment drains about $1 billion a year from the state's coffers when it and other cash-strapped states are dealing with falling revenue and looming deficits that have them slashing money for schools, closing prisons and furloughing state workers.

Yet political pressure makes it unlikely senior tax breaks will be touched to help bottom lines -- even as states steadily lose more to the tax breaks as the number of older taxpayers grows.

"As soon as you talk about reducing our generosity to seniors, somebody's going to say, `You want my grandpa to eat dog food,"' said Michigan State University economics professor Charles Ballard. "Obviously, the politics of it are very difficult."

Seniors have outsized clout because they vote more regularly than young voters. Most lawmakers fear they'll unleash a backlash if they trim benefits, even if those benefits are costing states money they don't have.

There's even talk among some states about increasing senior benefits. South Carolina, already the fourth-most-generous state, is considering legislation that would increase the homestead property tax break for seniors.

Elizabeth C. McNichol of the Washington-based Center for Budget and Policy Priorities said the senior tax breaks add up to anywhere from 0.5 percent to more than 4 percent of each state's general fund revenue.

Seniors will cost states more as their numbers increase and they need more help with nursing home costs, transportation and other services, she noted. That's especially worrisome to states with falling tax revenues and rising deficits.

Michigan's benefits are twice as generous as those of second-place Kentucky, according to McNichol's 2006 study on senior tax breaks. Georgia, South Carolina and Hawaii round out the top five.

But no Michigan lawmaker has introduced bills that would freeze the cap on exempted private pension income or begin taxing the Social Security income of higher-income seniors, as the federal
government does.

Ballard notes that a retired couple in Michigan can have over $100,000 of income without having to pay any state income tax. Michigan State studies have shown that around 95 percent of seniors pay no state income tax, and in many cases get extra money from the state because of a credit for property taxes they pay on their homes.

Tax-policy expert Bob Swanson said those figures show it might be time to consider a slight trim, or at least a redirection.

"I don't think anyone is saying, `Don't have any senior tax preferences.' But target them better on the people who need them," said Swanson, 63, a state government retiree who serves on the Michigan League for Human Services board of directors. "We're exempting a lot of people who certainly could afford to pay."

The league, an advocacy group for the poor, has suggested dropping Michigan's senior tax breaks to Kentucky's level to have more cash to put into the safety net for its hundreds of thousands of unemployed workers. Ballard said doing that could bring in an extra $200 million a year.

The prospect of change worries Sandy Slee, 65, a retired state bank examiner who lives about 10 miles southwest of Lansing with her husband, Lynn, a 68-year-old General Motors retiree. The couple lost their dental and vision benefits this year and pay more for health care. So any additional costs are a concern.

"I am absolutely opposed to them taxing our pension benefits," Sandy Slee said. "We no longer have a way to generate more income."

The Slees collect about $36,000 annually in Social Security payments and about $31,000 in pension payments, after federal taxes are taken out.

They pay no state income taxes on any of it. Michigan also exempts public pension benefits from income taxes, and up to $45,120 a year for an individual filer and $90,240 for joint filers in private retirement and pension benefits.

The couple isn't opposed to paying more in taxes to support education and other services, but think everyone should pay those increases.

Steve Gools, spokesman for the Michigan chapter of the AARP, said trimming tax breaks for the 1 million seniors who claim them might be acceptable to help the state balance its books, but only if the pain is shared.

"Anyone who attempts to take a huge bite out of tax savings that are uniquely owned by senior citizens without asking for a similar sacrifice by other taxpayers is a nonstarter,"' Gools said. "It's going to be a matter of the balance and the fairness of the approach."

The lost revenue will mount as the senior population grows. The proportion of the national population aged 65 and older is projected to grow from 12.4 percent in 2000 to 19.7 percent by 2030, according to McNichol's study. That means more people will be qualifying for senior tax breaks when the demand for senior services will be going up.

Many of the extra credits were added decades ago, when senior poverty was a significant issue. But as seniors overall have grown more prosperous, their tax breaks haven't been phased out for those in higher income brackets.

That's not true at the federal level, where a portion of middle- and upper-income citizens' Social Security began being taxed in the 1980s. The federal government also bans exemptions for pension income.

McNichol said states might have to make similar moves.

"It's definitely something that states need to think about in terms of preparing for the longer term as we come out of this fiscal crisis," she said.

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On the Net:

Center for Budget and Policy Priorities report

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Also: A look at trends in state's tax breaks for seniors, according to the Washington-based Center for Budget and Policy Priorities:

• The 10 states with the most generous senior tax breaks are Michigan, Kentucky, Georgia, South Carolina, Hawaii, Indiana, Idaho, Oregon, Wisconsin and Arkansas.
• Twenty-eight states completely exempt Social Security income from the income tax, while 33 states fully or partially exempt pension income.
• Nine out of ten states offer added income tax exemptions, standard deductions or credits based on age, and about half the states offer homestead exemptions or credits targeted to the elderly.

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A look at Michigan's senior tax breaks, the most generous in the nation:

• Michigan exempts all Social Security and public pension benefits from income taxes, as well as up to $45,120 a year for a single return and $90,240 on a joint return in private retirement and pension benefits, a cap that increases annually with inflation.
• Taxpayers aged 65 or older also get to deduct up to $10,058 on a single return or $20,115 on a joint return in interest, dividends and capital gains. The deduction is reduced by any deduction for
  retirement and pension benefits.
• Those 65 and over get double the $2,300 annual tax exemption other taxpayers get.
• Seniors can claim a larger proportion of their property taxes in figuring their homestead property tax credit on their income taxes. The average credit for seniors is more than 1.5 larger than the average credit for other filers.
• The home-heating credit allows low-income seniors to claim extra exemptions which increases the available credit. -- Source: Michigan Department of Treasury