On Pedestal

Taxing pensions is a perilous, though rational, move, said Elizabeth McNichol, senior fellow at the Washington-based Center for Budget and Policy Priorities, a fiscal-research group aligned with Democrats. States began exempting retirement income from taxes 40 years ago when a larger percentage of seniors were poor. Now, retirees are better off, and a growing population of them requires state services, McNichol said in an interview.

“The question is why we treat one kind of income differently from others,” McNichol said. “We sort of put it on a pedestal.”

Michigan’s median age jumped to 39 from 35.5 from 2000 to 2010, according to the U.S. Census. The number of residents 65 and older increased by about 12 percent in that period.

The average 2011 federally adjusted gross income for tax filers 65 and older was $46,027, compared with $51,331 for those under 65, according to the state treasury department.

Kentucky’s Concern

Five states with income taxes exclude public or private pensions -- Alabama, Hawaii, Illinois, Mississippi and Pennsylvania -- according to a 2010 report by the National Conference of State Legislatures. Kentucky taxes only pension income above $41,100 for most retirees, the most generous exemption among states.

A proposal by Kentucky Governor Steve Beshear this year to increase pension taxes fizzled amid election politics, said Jason Bailey, director of the nonpartisan Kentucky Center for Economic Policy, which is in Berea. It was part of a sweeping plan to modify state taxes.

A February report by the group said the state loses several hundred million dollars annually in revenue through generous exemptions on retirement income.

“With an aging Baby Boomer population, it’s going to be more of a problem when we exempt huge amounts of their income,” Bailey said in an interview. “We need to do it in a progressive way. Not doing it, from a policy perspective, is very harmful.”

The impact of taxes on retirees has been debated among economists. A May report by the Center for Budget and Policy Priorities concluded that taxes had little impact on where people choose to live. Jobs, housing costs, family matters and warmer climates are more likely reasons why people migrate from state to state, according to the study.