LANSING – Gov. Rick Snyder’s new plan to tax the pensions of private and public workers does not violate the state constitution and may proceed, according to a Nov. 18 ruling by a divided Michigan Supreme Court.

Employee pensions had been tax-free in Michigan, but Snyder and state Republican lawmakers  earlier this year imposed a 4.35 percent tax which will generate an expected $230 million for the state budget in 2012. Snyder and other state lawmakers asked for a ruling from the Supremes because of the fast-track need for the new revenue. The tax will begin to be imposed effective Jan. 1, 2012.

The new tax on employee pensions was met with great rancor earlier this year. Along with other public employee concessions and the removal of personal income tax credits, the new pension tax was part of a $1.2 billion package in revenue enhancements to the state that was balanced with a commensurate tax break for businesses.

The state Supreme Court ruling was typically partisan, with four Republican justices ruling in favor of the plan, and three Democratic justices ruling that Snyder’s plan violated the state constitution.

“Today’s Supreme Court ruling on Gov. Snyder’s pension tax proposal is a partisan decision that will hurt Michigan seniors, and is yet another example of the misplaced priorities of Lansing politicians,” said Michigan AFL-CIO President Karla Swift. “Raising taxes on pensions while continuing to protect the CEOs and big corporations that have been outsourcing Michigan jobs is going to further our state’s jobs crisis. It will increase the hardship on working and middle class families and on local businesses like grocery stores and pharmacies.”

The ruling, however, didn’t give Snyder all he wanted. The high court ruled that the Constitution’s ban on having a graduated income tax prohibited Snyder’s plan to effectively raise taxes on higher income pension earners ($75,000/year, $150,000 for joint filers). That ruling creates a $60 million hole in the budget, which Snyder and state lawmakers will have to address.

The new law keeps the pension income tax exemption for retirees who will be at least 67 in 2012, and a portion of them for retirees who will be between the ages of 60-66.

Opponents vowed to fight the ruling, likely in federal court. Bob Kopasz, chair of the Michigan State Employee Retirees Association Coordinating Council said: “State employee retiree pensions have been exempt from the income tax since 1943. In 1964, the statutory exemption from taxation of all public pensions was enshrined in our Michigan Constitution. The Legislature has no authority to violate the Constitution and tax public pensions.”

Snyder said in a statement: “Our administration has been unwavering in its position that the removal of the public pension income tax exemption was the right and prudent thing to do. It will provide for the long-term structural stability of the state’s budget while minimizing the impact on current retirees and seniors. This will help get Michigan’s fiscal house in order and economy back on track.

Brett Huebner, an attorney for the Southfield law firm of Novara Tesija, which advises a number of building trades union funds in Michigan, said “a lot of people were hoping that the law would be struck down, but that didn’t happen. People with pension income are adversely impacted by the new tax. But there are still exemptions that apply, and a portion of retiree’s pension income will remain exempt.”

Analyses of the exemptions in the legislation indicate that the new pension rules will have various age-related impacts, with a greater tax impact on younger pensioners. Those born before 1946 will see no change in how their pension is taxed. Those born between 1946 and 1952 will have exemptions on the first $20,000 of pension income on a single return and $40,000 on a joint return. After 1952, there is no special pension deduction.

“The Republican Supreme Court may have deemed Gov. Snyder’s tax increase on our seniors to be constitutional, but that doesn’t make it a good idea,” said Michigan Senate Minority Leader Gretchen Whitmer (D-East Lansing). “It still places an undue burden on those who can least afford it and hands their hard earned money over to big business in the form of tax breaks. It doesn’t take a court ruling to tell the people of Michigan that is wrong.”