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More States Consider Taxing Pension Benefits

Some states are back on the senior tax break warpath. Facing massive budget deficits, they’re rethinking whether pensions should be exempt from taxes.

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In recent weeks, Michigan governor Rick Snyder has come under fire for suggesting that the state should tax income from public and private pensions. At the same time, Illinois is considering taxing the pensions of wealthier retirees, exempting those who only get Social Security income. And a proposal to tax individuals with pensions over $100,000 for individuals and $200,000 for couples is weaving its way through Hawaii’s government.

Snyder, in Michigan, hopes to raise $900 million by taxing pensions – which would help the state offset the $1.7 billion cut for business taxes he wants to enact. In Hawaii, taxing wealthier individuals would affect less than 1 percent of the state’s taxpayers and bring in about $17 million, state senators say, helping to narrow the state’s $700 million budget gap.

In some ways, these states are behind the ball. Already, 36 of the 41 states with a personal income tax have some sort of tax on pensions, according to the National Conference of State Legislatures – though many of them offer exclusions for state and federal pensions, or specific exclusion amounts.  The lack of pension taxes has made Michigan, as Phil Power, founder of the Center for Michigan think tank, puts it, “a tax-free haven for older people while driving the younger ones away.” On the flip side, critics of Illinois’ proposal say taxing the rich will just cause them to move to another state.

Readers, what do you think? Should these states join the bandwagon or hold off and remain tax havens for seniors?

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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