Michigan Supreme Court
Lansing, Michigan
Chief Justice: Justices:
Opinion Robert P. Young, Jr. Michael F. Cavanagh
Marilyn Kelly
Stephen J. Markman
Diane M. Hathaway
Mary Beth Kelly
Brian K. Zahra
FILED NOVEMBER 18, 2011
STATE OF MICHIGAN
SUPREME COURT
In re REQUEST FOR ADVISORY
OPINION REGARDING
CONSTITUTIONALITY OF 2011 PA 38 No. 143157
BEFORE THE ENTIRE BENCH
MARKMAN, J.
Pursuant to Const 1963, art 3, § 8, this Court granted the Governor’s request for an
advisory opinion on the constitutionality of 2011 PA 38.1 More specifically, we granted
the Governor’s request to address the following four constitutional questions:
(1) whether reducing or eliminating the statutory exemption for
public-pension incomes as described in MCL 206.30, as amended, impairs
accrued financial benefits of a “pension plan [or] retirement system of the
state [or] its political subdivisions” under Const 1963, art 9, § 24; (2)
whether reducing or eliminating the statutory tax exemption for pension
incomes, as described in MCL 206.30, as amended, impairs a contract
obligation in violation of Const 1963, art 1, § 10 or US Const, art I, § 10(1);
(3) whether determining eligibility for income-tax exemptions on the basis
of total household resources, or age and total household resources, as
1
Const 1963, art 3, § 8 provides, “Either house of the legislature or the governor may
request the opinion of the supreme court on important questions of law upon solemn
occasions as to the constitutionality of legislation after it has been enacted into law but
before its effective date.”
described in MCL 206.30(7) and (9), as amended, creates a graduated
income tax in violation of Const 1963, art 9, § 7; and (4) whether
determining eligibility for income-tax exemptions on the basis of date of
birth, as described in MCL 206.30(9), as amended, violates equal protection
of the law under Const 1963, art 1, § 2 or the Fourteenth Amendment of the
United States Constitution. [In re Request for Advisory Opinion Regarding
Constitutionality of 2011 PA 38, 489 Mich 954 (2011).]
We answer all these questions, with the exception of whether 2011 PA 38 creates a
graduated income tax, in the negative. That is, we hold that:
Reducing or eliminating the statutory exemption for public-pension incomes as set
forth in MCL 206.302 does not impair accrued financial benefits of a “pension
plan [or] retirement system of the state [or] its political subdivisions” under Const
1963, art 9, § 24; and
Reducing or eliminating the statutory tax exemption for pension incomes as set
forth in MCL 206.30 does not impair a contractual obligation in violation of Const
1963, art 1, § 10 or US Const, art I, § 10(1).
And we hold unanimously that:
Determining eligibility for income-tax exemptions on the basis of date of birth as
set forth in MCL 206.30(9) does not violate the equal protection of the law under
Const 1963, art 1, § 2 or the Fourteenth Amendment of the United States
Constitution; and
2
Unless otherwise specified, all references to MCL 206.30 are to that provision as
amended by 2011 PA 38.
2
Determining eligibility for income-tax exemptions and deductions on the basis of
total household resources as set forth in MCL 206.30(7) and (9) does create a
graduated income tax in violation of Const 1963, art 9, § 7.
Finally, we hold that:
Pursuant to MCL 8.5, the unconstitutional portions of 2011 PA 38 can reasonably
be severed from the remainder of the act, which is constitutional with respect to all
the issues raised.
Although Justice HATHAWAY agrees that those portions of the statutes that we
sever ought to be struck down because they are unconstitutional, she nevertheless asserts
that we are “judicially creating tax deductions and exemptions for individuals earning
more than $75,000 annually . . . .” Post at 2. This is an odd assertion, given that she too
would “create tax deductions and exemptions for individuals earning more than $75,000”
by striking down the amendments of these provisions in their entirety and thereby
returning the law to its pre-2011 PA 38 status, in which taxpayers earning more than
$75,000 received these same deductions and exemptions.
We emphasize that the questions before us are all constitutional questions. This
Court is not deciding whether 2011 PA 38 represents wise or unwise, prudent or
imprudent public policy, only whether 2011 PA 38 is consistent with the constitutions of
the United States and Michigan.
I. BACKGROUND
On May 25, 2011, the Governor signed into law Enrolled House Bill 4361, which
became 2011 PA 38. The particular provisions at issue here are MCL 206.30(7) and
3
MCL 206.30(9) of the Income Tax Act,3 which will take effect January 1, 2012. MCL
206.30(7) provides in pertinent part:
For a taxpayer whose total household resources[4] are $75,000.00 or
more for a single return or $150,000.00 or more for a joint return, the
personal exemption allowed under [MCL 206.30(2)] [5] shall be adjusted by
multiplying the exemption for the tax year for a single return by a fraction,
the numerator of which is $100,000.00 minus the taxpayer’s total
household resources, and the denominator of which is $25,000.00, and for a
joint return by a fraction, the numerator of which is $200,000.00 minus the
taxpayer’s total household resources, and the denominator of which is
$50,000.00. The personal exemption allowed under [MCL 206.30(2)] shall
not be allowed for a single taxpayer whose total household resources
exceed $100,000.00 or for joint filers whose total household resources
exceed $200,000.00.
MCL 206.30(9) provides:
In determining taxable income under this section, the following
limitations and restrictions apply:
(a) For a person born before 1946, this subsection provides no
additional restrictions or limitations under [MCL 206.30(1)(f)].
3
MCL 206.1 et seq.
4
Under 2011 PA 38, the term “total household resources” is defined as
all income received by all persons of a household in a tax year while
members of a household, plus any net business loss after netting all
business income and loss, plus any net rental or royalty loss, plus any
deduction from federal adjusted gross income for a carryback or
carryforward of a net operating loss as defined in [26 USC 172(b)(2)].
[MCL 206.508(4).]
5
MCL 206.30(2) provides, “Except as otherwise provided in [MCL 206.30(7)], a
personal exemption of $3,700.00 multiplied by the number of personal or dependency
exemptions allowable on the taxpayer’s federal income tax return pursuant to the internal
revenue code shall be subtracted in the calculation that determines taxable income.”
4
(b) For a person born in 1946 through 1952, the sum of the
deductions under [MCL 206.30(1)(f)(i), (ii), and (iv)][6] is limited to
$20,000.00 for a single return and $40,000.00 for a joint return. After that
person reaches the age of 67, the deductions under [MCL 206.30(1)(f)(i),
(ii), and (iv)] do not apply and that person is eligible for a deduction of
$20,000.00 for a single return and $40,000.00 for a joint return, which
deduction is available against all types of income and is not restricted to
income from retirement or pension benefits. However if that person’s total
household resources exceed $75,000.00 for a single return or $150,000.00
for a joint return, that person is not eligible for a deduction of $20,000.00
for a single return and $40,000.00 for a joint return. A person that takes the
6
MCL 206.30(1)(f) provides, in pertinent part:
Deduct the following to the extent included in adjusted gross income
subject to the limitations and restrictions set forth in [MCL 206.30(9)]:
(i) Retirement or pension benefits received from a federal public
retirement system or from a public retirement system of or created by this
state or a political subdivision of this state.
(ii) Retirement or pension benefits received from a public retirement
system of or created by another state or any of its political subdivisions if
the income tax laws of the other state permit a similar deduction or
exemption or a reciprocal deduction or exemption of a retirement or
pension benefit received from a public retirement system of or created by
this state or any of the political subdivisions of this state.
* * *
(iv) Beginning on and after January 1, 2007, retirement or pension
benefits not deductible under [MCL 206.30(1)(f)(i)] or [MCL 206.30(1)(e)]
from any other retirement or pension system or benefits from a retirement
annuity policy in which payments are made for life to a senior citizen, to a
maximum of $42,240.00 for a single return and $84,480.00 for a joint
return. The maximum amounts allowed under this subparagraph shall be
reduced by the amount of the deduction for retirement or pension benefits
claimed under [MCL 206.30(1)(f)(i)] or [MCL 206.30(1)(e)] and by the
amount of a deduction claimed under [MCL 206.30(1)(p)]. For the 2008
tax year and each tax year after 2008, the maximum amounts allowed under
this subparagraph shall be adjusted by the percentage increase in the United
States consumer price index for the immediately preceding calendar year.
The department shall annualize the amounts provided in this subparagraph
as necessary. As used in this subparagraph, “senior citizen” means that
term as defined in [MCL 206.514].
5
deduction under [MCL 206.30(1)(e)][7] is not eligible for the unrestricted
deduction of $20,000.00 for a single return and $40,000.00 for a joint return
under this subdivision.
(c) For a person born after 1952, the deduction under [MCL
206.30(1)(f)(i), (ii), or (iv)] does not apply. When that person reaches the
age of 67, that person is eligible for a deduction of $20,000.00 for a single
return and $40,000.00 for a joint return, which deduction is available
against all types of income and is not restricted to income from retirement
or pension benefits. If a person takes the deduction of $20,000.00 for a
single return and $40,000.00 for a joint return, that person shall not take the
deduction under [MCL 206.30(1)(f)(iii)][8] and shall not take the personal
exemption under [MCL 206.30(2)]. That person may elect not to take the
deduction of $20,000.00 for a single return and $40,000.00 for a joint return
and elect to take the deduction under [MCL 206.30(1)(f)(iii)] and the
personal exemption under [MCL 206.30(2)] if that election would reduce
that person’s tax liability. However, if that person’s total household
resources exceed $75,000.00 for a single return or $150,000.00 for a joint
return, that person is not eligible for a deduction of $20,000.00 for a single
return and $40,000.00 for a joint return. A person that takes the deduction
under [MCL 206.30(1)(e)] is not eligible for the unrestricted deduction of
$20,000.00 for a single return and $40,000.00 for a joint return under this
subdivision.
(d) For a joint return, the limitations and restrictions in this
subsection shall be applied based on the age of the older spouse filing the
joint return.
7
MCL 206.30(1)(e) provides:
Deduct, to the extent included in adjusted gross income, the
following:
(i) Compensation, including retirement benefits, received for
services in the armed forces of the United States.
(ii) Retirement or pension benefits under the railroad retirement act
of 1974, 45 USC 231 to 231v.
8
MCL 206.30(1)(f)(iii) allows a deduction for “[s]ocial security benefits as defined in
[26 USC 86].”
6
Before the enactment of 2011 PA 38, public-pension benefits were completely
deductible,9 private-pension benefits were deductible up to $42,240 for a single return
and $84,480 for a joint return (subject to annual inflation adjustments), and all taxpayers
were entitled to a personal exemption of $2,500 (subject to annual inflation adjustments).
See MCL 206.30(1)(f), (2), and (7), as amended by 2009 PA 134. Pursuant to 2011 PA
38, however, not all public pensions are deductible, not all private pensions are
deductible up to $42,240 or $84,480, and not all taxpayers are entitled to a personal
exemption. MCL 206.30(7) and (9). Instead, only those taxpayers whose total household
resources are less than $75,000 for a single return or $150,000 for a joint return are
entitled to the entire personal exemption (which is now $3,700),10 while those taxpayers
whose total household resources are between $75,000 and $100,000 for a single return or
$150,000 and $200,000 for a joint return are entitled to a portion of this personal
9
All public-pension benefits were completely deductible under the Income Tax Act. In
addition, the State Employees’ Retirement Act, MCL 38.40, the Public School
Employees Retirement Act, MCL 38.1346(1), the Michigan Legislative Retirement
System Act, MCL 38.1057(1), the city library employees’ retirement system act, MCL
38.705, and the Judges Retirement Act, MCL 38.2670(1), exempted certain public-
pension benefits from taxation. All these acts were amended to remove the statutory
exemption from state taxes consistently with 2011 PA 38. See 2011 PA 41, 2011 PA 42,
2011 PA 43, 2011 PA 44, and 2011 PA 45. Although the Governor’s request and our
order in this case referred explicitly only to 2011 PA 38, because Public Acts 41 through
45 of 2011 are inextricably linked to the issues raised in this case, we make clear that we
have considered these statutory amendments when reviewing the issues in this case, and
our holding takes into account whatever effect each of these provisions may have on the
issues raised. Citing this footnote, Justice CAVANAGH asserts that this opinion “sweeps
far too wide in attempting to foreclose the myriad possible challenges premised on
individual factual circumstances.” Post at 9. However, we refer to these other provisions
only because they are relevant to the question before us: whether reducing or eliminating
the statutory tax exemption for public-pension incomes impairs the accrued financial
benefits of a public-pension plan.
10
MCL 206.30(2).
7
exemption, and those taxpayers whose total household resources exceed $100,000 for a
single return or $200,000 for a joint return are not entitled to any portion of the personal
exemption. MCL 206.30(7).
In addition, while 2011 PA 38 does not affect the available pension deductions of
those people born before 1946, it does affect the pension deductions of those people born
in 1946 and thereafter. MCL 206.30(9). For those people born on or after January 1,
1946 and not after December 31, 1952, public and private pensions are subject to the
same deductions up to $20,000 for a single return and $40,000 for a joint return. MCL
206.30(9)(b). And, upon reaching the age of 67, although the pension deductions are no
longer available, a general deduction11 is available for those people up to $20,000 for a
single return and $40,000 for a joint return as long as the taxpayer’s total household
resources do not exceed $75,000 for a single return or $150,000 for a joint return. Id.
Finally, for those people born after December 31, 1952, although the pension deductions
are no longer available, upon reaching the age of 67, a general deduction is available up
to $20,000 for a single return and $40,000 for a joint return as long as the taxpayer’s total
household resources do not exceed $75,000 for a single return or $150,000 for a joint
return. MCL 206.30(9)(c). However, if a taxpayer takes the general deduction, he or she
cannot take the deduction for social security benefits or the personal exemption. Id.
The Governor, in a letter dated May 31, 2011, requested an advisory opinion
regarding the constitutionality of 2011 PA 38. On June 15, 2011, we granted this request,
11
A general deduction is a deduction that is “available against all types of income and is
not restricted to income from retirement or pension benefits.” MCL 206.30(9)(b).
8
invited the Attorney General to submit briefs and argue as both opponent and proponent
of the matters at issue, invited other interested parties to file briefs amicus curiae, and, on
September 7, 2011, heard oral arguments.12
II. STANDARDS
“Statutes are presumed to be constitutional, and courts have a duty to construe a
statute as constitutional unless its unconstitutionality is clearly apparent.” Taylor v Gate
Pharm, 468 Mich 1, 6; 658 NW2d 127 (2003). “We exercise the power to declare a law
unconstitutional with extreme caution, and we never exercise it where serious doubt
exists with regard to the conflict.” Phillips v Mirac, Inc, 470 Mich 415, 422; 685 NW2d
174 (2004). “‘Every reasonable presumption or intendment must be indulged in favor of
the validity of an act, and it is only when invalidity appears so clearly as to leave no room
for reasonable doubt that it violates some provision of the Constitution that a court will
refuse to sustain its validity.’” Id. at 423, quoting Cady v Detroit, 289 Mich 499, 505;
286 NW 805 (1939). Therefore, “the burden of proving that a statute is unconstitutional
rests with the party challenging it,” In re Request for Advisory Opinion Regarding
Constitutionality of 2005 PA 71, 479 Mich 1, 11; 740 NW2d 444 (2007), in this case the
opposing Attorney General. “[W]hen considering a claim that a statute is
unconstitutional, the Court does not inquire into the wisdom of the legislation.” Taylor,
468 Mich at 6.
12
To avoid confusion, the terms “supporting Attorney General” and “opposing Attorney
General” will be used throughout this opinion to identify the briefs and argument
submitted by the Attorney General as the proponent and opponent, respectively, of the
constitutionality of 2011 PA 38.
9
“The presumption of constitutionality is especially strong with respect to taxing
statutes.” Caterpillar, Inc v Dep’t of Treasury, 440 Mich 400, 413; 488 NW2d 182
(1992). “State legislatures have great discretionary latitude in formulating taxes.” Id.
“‘The legislature must determine all questions of State necessity, discretion or policy in
ordering a tax and in apportioning it. 1 Cooley, Taxation (4th ed), § 67. And the judicial
tribunals of the State have no concern with the policy of State taxation determined by the
legislature. 1 Cooley, Taxation (4th ed), § 67.’” Id. at 414, quoting C F Smith Co v
Fitzgerald, 270 Mich 659, 670; 259 NW 352 (1935). Therefore, “[a] taxing statute must
be shown to clearly and palpably violate[] the fundamental law before it will be declared
unconstitutional.” Caterpillar, 440 Mich at 415, quoting O’Reilly v Wayne Co, 116 Mich
App 582, 592; 323 NW2d 493 (1982) (citations and quotation marks omitted; alteration
in O’Reilly).
“‘When reviewing constitutional provisions, the objective of such review is to
effectuate the intent of the people who adopted the constitution.’” Straus v Governor,
459 Mich 526, 533; 592 NW2d 53 (1999), quoting Straus v Governor, 230 Mich App
222, 228; 583 NW2d 520 (1998). “‘The lodestar principle is that of “common
understanding,” the sense of the words used that would have been most obvious to those
who voted to adopt the constitution.’” Id. “‘Both sides have cited portions of the
“Address to the People” and the record of the Constitutional Convention, both of which
may properly be considered in interpreting constitutional provisions.’” Straus, 495 Mich
at 533, quoting Straus, 230 Mich App at 228 n 2.13 However, it must be remembered that
13
While on more than one occasion this Court has explained why it does not find all
forms of legislative history to be useful tools in the interpretative process, see, e.g., In re
10
although this Court has continually recognized that constitutional
convention debates are relevant to determining the meaning of a particular
provision, . . . the proper objective in consulting constitutional convention
debates is not to discern the intent of the framers in proposing or supporting
a specific provision, but to determine the intent of the ratifiers in adopting
the provision . . . .
* * *
Bearing this principle in mind, the primary focus . . . should not [be]
on the intentions of the delegates . . . but, rather, on any statements they
may have made that would have shed light on why they chose to employ
the particular terms they used in drafting the provision to aid in discerning
what the common understanding of those terms would have been when the
provision was ratified by the people. [Studier v Mich Pub Sch Employees’
Retirement Bd, 472 Mich 642, 655-657; 698 NW2d 350 (2005) (citations
omitted; emphasis added).]
Certified Question from the United States Court of Appeals for the Sixth Circuit, 468
Mich 109, 115 n 5; 659 NW2d 597 (2003), this Court has consistently held that the
Address to the People and the constitutional convention debates may be highly relevant
in determining the meaning of particular constitutional provisions to the ratifiers, see,
e.g., Studier v Mich Pub Sch Employees’ Retirement Bd, 472 Mich 642, 655-656; 698
NW2d 350 (2005). The Address is particularly important in this regard because it
represents what the ratifiers, the people, were told about the proposed constitution before
they voted to adopt it. See People v Nutt, 469 Mich 565, 590 n 26; 677 NW2d 1 (2004)
(“The Address to the People, widely distributed to the public prior to the ratification vote
in order to explain the import of the . . . proposals, ‘is a valuable tool . . . .’”) (citation
omitted). Moreover, unlike other forms of legislative history, such as “legislative
analyses” created within the legislative branch by staff persons, the Address was
“officially approved by the members of the constitutional convention . . . .” Mich United
Conservation Clubs v Secretary of State (After Remand), 464 Mich 359, 378; 630 NW2d
297 (2001) (YOUNG, J., concurring). Finally, the Address represents the best statement of
the convention as a whole, as a collective body, rather than merely the statements of
individual convention delegates. Nonetheless, we believe that even the latter has greater
value in supplying evidence of the intended meaning of constitutional provisions, which
of necessity tend to be broad and general expressions of policy, than do the statements of
individual legislators with regard to statutes, which tend to be more specific and limited
expressions of policy.
11
III. ANALYSIS
A. ACCRUED FINANCIAL BENEFIT
The first issue contained in the Governor’s request for an advisory opinion
concerns whether reducing or eliminating the statutory exemption for public-pension
incomes as set forth in MCL 206.30 impairs accrued financial benefits of a “pension plan
[or] retirement system of the state [or] its political subdivisions” under Const 1963, art 9,
§ 24. The first clause of Const 1963, art 9, § 24 provides, “The accrued financial benefits
of each pension plan and retirement system of the state and its political subdivisions shall
be a contractual obligation thereof which shall not be diminished or impaired thereby.”
Before § 24 was adopted, “[i]t had long been the general rule that pensions granted by
public authorities were not contractual obligations but gratuitous allowances which could
be revoked at will by the authority because the pensioner was not deemed to have had
any vested right in their continuation.” Advisory Opinion re Constitutionality of 1972 PA
258, 389 Mich 659, 662; 209 NW2d 200 (1973).14 The obvious intent of § 24, however,
was to ensure that public pensions be treated as contractual obligations that, once earned,
could not be diminished. As explained by Delegate Richard Van Dusen, who served on
the Finance and Taxation Committee and was the chairman of the Rules and Resolutions
Committee, at the Constitutional Convention of 1961-1962,
14
See, e.g., Brown v Highland Park, 320 Mich 108, 114; 30 NW2d 798 (1948) (“We are
convinced that the majority of cases in other jurisdictions establishes the rule that a
pension granted by public authorities is not a contractual obligation, that the pensioner
has no vested right, and that a pension is terminable at the will of a municipality, at least
while acting within reasonable limits.”).
12
[§ 24] is designed to . . . give to the employees participating in these plans a
security which they do not now enjoy, by making the accrued financial
benefits of the plans contractual rights. This, you might think, would go
without saying, but several judicial determinations have been made to the
effect that participants in pension plans for public employees have no
vested interest in the benefits which they believe they have earned; that the
municipalities and the state authorities which provide these plans provide
them as a gratuity, and therefore it is within the province of the
municipality or the other public employer to terminate the plan at will
without regard to the benefits which have been, in the judgment of the
employees, earned.
Now, it is the belief of the committee that the benefits of pension
plans are in a sense deferred compensation for work performed. And with
respect to work performed, it is the opinion of the committee that the public
employee should have a contractual right to benefits of the pension plan,
which should not be diminished by the employing unit after the service has
been performed. [1 Official Record, Constitutional Convention 1961,
pp 770-771, quoted with approval in Advisory Opinion, 389 Mich at 663.]
Const 1963, art 9, § 24, however, says nothing about whether these pension
benefits can be taxed. And given the broad authority to tax granted to the Legislature by
Const 1963, art 9, § 115 and the specific constitutional prohibition against “surrender[ing],
15
Const 1963, art 9, § 1 provides, “The legislature shall impose taxes sufficient with
other resources to pay the expenses of state government.” See also Civil Serv Comm v
Auditor General, 302 Mich 673, 682-683; 5 NW2d 536 (1942), in which this Court
explained:
[T]he control of the purse strings of government is a legislative
function. Indeed, it is the supreme legislative prerogative, indispensable to
the independence and integrity of the legislature, and not to be surrendered
or abridged, save by the Constitution itself, without disturbing the balance
of the system and endangering the liberties of the people. The right of the
legislature to control the public treasury, to determine the sources from
which the public revenues shall be derived and the objects upon which they
shall be expended, to dictate the time, the manner, and the means both of
their collection and disbursement, is firmly and inexpugnably established in
our political system. This supreme prerogative of the legislature, called in
question by Charles I, was the issue upon which Parliament went to war
with the king, with the result that ultimately the absolute control of
13
suspend[ing] or contract[ing] away” this authority, Const 1963, art 9, § 2,16 a limitation
on the Legislature’s authority to tax pensions cannot reasonably be read into Const 1963,
art 9, § 24. 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 in § 24. See Shivel v Kent Co Treasurer, 295 Mich 10, 15; 294
NW 78 (1940) (“The power to levy taxes for governmental needs is in the legislature
subject only to limitations and regulations found in the Constitution.”). That the ratifiers
knew how to do so had they so intended is clearly evidenced by the fact that they did, in
fact, expressly limit the Legislature’s authority to tax nonprofit religious or educational
organizations in Const 1963, art 9, § 417 and the sale of prescription drugs and food in
Const 1963, art 9, § 8.18
Parliament over the public treasury was forever vindicated as a fundamental
principle of the British Constitution. The American commonwealths have
fallen heirs to this great principle, and the prerogative in question passes to
their legislatures without restriction or diminution, except as provided by
their Constitutions, by the simple grant of the legislative power. [Citations
and quotation marks omitted.]
16
Const 1963, art 9, § 2 provides, “The power of taxation shall never be surrendered,
suspended or contracted away.”
17
Const 1963, art 9, § 4 provides, “Property owned and occupied by non-profit religious
or educational organizations and used exclusively for religious or educational purposes,
as defined by law, shall be exempt from real and personal property taxes.”
18
Const 1963, art 9, § 8 provides, in pertinent part:
No sales tax or use tax shall be charged or collected from and after
January 1, 1975 on the sale or use of prescription drugs for human use, or
on the sale or use of food for human consumption except in the case of
prepared food intended for immediate consumption as defined by law.
14
Again, Const 1963, art 9, § 24 provides that “[t]he accrued financial benefits of
each pension plan and retirement system of the state and its political subdivisions shall be
a contractual obligation thereof which shall not be diminished or impaired thereby.” A
tax exemption is not an “accrued financial benefit” of a pension plan. “Accrue” means
“‘to increase, grow,’” “‘to come into existence as an enforceable claim,’” to “‘vest as a
right,’” “‘to come by way of increase or addition: arise as a growth or result,’” “‘to be
periodically accumulated in the process of time,’” to “‘gather, collect, accumulate,’” “‘to
happen or result as a natural growth,’” to “‘arise in due course,’” to “‘come or fall as an
addition or increment,’” and “to become a present and enforceable right or demand.”
Studier, 472 Mich at 653, quoting Webster’s Third New Int’l Dictionary (1961), p 13 and
Random House American College Dictionary (1964), p 9. See also Random House
Webster’s College Dictionary (1991) (defining “accrue” as “to happen or result as a
natural growth, addition,” “to be added as a matter of periodic gain or advantage, as
interest on money,” and “to accumulate or earn over time”).19
Thus, according to these definitions, the ratifiers of our Constitution
would have commonly understood “accrued” benefits to be benefits of the
type that increase or grow over time—such as a pension payment or
19
Justice CAVANAGH “do[es] not see how these definitions mandate that the benefit must
‘increase or grow over time.’” Post at 4. Once again, these definitions of “accrue”
include “‘to increase, grow,’” “‘arise as a growth or result,’” “‘to be periodically
accumulated in the process of time,’” to “‘gather, collect, accumulate,’” “‘to happen or
result as a natural growth,’” to “‘arise in due course,’” to “‘come or fall as an addition or
increment,’” Studier, 472 Mich at 653, quoting Webster’s Third New Int’l Dictionary
(1961), p 13, and Random House American College Dictionary (1964), p 9, “to be added
as a matter of periodic gain or advantage, as interest on money,” and “to accumulate or
earn over time,” Random House Webster’s College Dictionary (1991). Given these
definitions, we do not see how Studier’s holding that an accrued benefit is a benefit that
“increase[s] or grow[s] over time” can be seriously contested.
15
retirement allowance that increases in amount along with the number of
years of service a public school employee has completed.[20] [Studier, 472
Mich at 654.][21]
A pension-tax exemption is not an “accrued” benefit because it does not “grow
over time.” During a state employee’s working years, his or her pension-tax exemption,
as opposed to the pension itself, cannot be said to be growing or accumulating because it
does not even “come into existence” or “vest” until after the employee has retired and
begins to collect his or her pension benefits. That is, one does not have a right to a tax
exemption until one has received the funds that are subject to the exemption. Absent
those funds, there is no tax exemption. And once a retiree has begun to receive his or her
pension benefits, the tax exemption itself still does not “grow over time,” but remains
fixed. Therefore, a tax exemption is not an “accrued financial benefit.”22
The second clause of Const 1963, art 9, § 24 states, “Financial benefits arising on
account of service rendered in each fiscal year shall be funded during that year and such
funding shall not be used for financing unfunded accrued liabilities.” This clause
confirms that a tax exemption is not an “accrued financial benefit” protected by § 24
20
See also Kosa v State Treasurer, 408 Mich 356, 370-371; 292 NW2d 452 (1980) (“The
term ‘accrued financial benefits’ was defined by this Court in Advisory Opinion re
Constitutionality of 1972 PA 258, 389 Mich 659, 662-663; 209 NW2d 200 [1973], as the
right to receive certain pension payments upon retirement, based upon service
performed.”).
21
In Studier, this Court held that health-care benefits are not “accrued financial benefits”
because they do not “grow over time.” Studier, 472 Mich at 654.
22
In concluding that the “tax exemption does ‘increase or grow over time,’” post at 6
(emphasis in the original), Justice CAVANAGH fails to recognize that this exemption does
not even come into being until the employee retires and begins to collect his or her
pension benefits.
16
because it would be impossible to fund a tax exemption, as opposed once again to the
pension itself, in the year that the service was rendered in light of the fact that an
exemption’s value is entirely a function of the tax rate of the taxpayer at the time that the
exemption is actually taken-- something that obviously cannot be known at the time the
services themselves are rendered.23
Finally, the constitutional convention debates reinforce this conclusion. As this
Court explained in Studier, 472 Mich at 657:
“The only explicit elaboration on the term ‘accrued financial
benefits’ was this remark by delegate Van Dusen:
“‘[T]he words “accrued financial benefits” were used designedly, so
that the contractual right of the employee would be limited to the deferred
compensation embodied in any pension plan, and that we hope to avoid
thereby a proliferation of litigation by individual participants in retirement
systems talking about the general benefits structure, or something other
than his specific right to receive benefits.’” [Id., quoting Musselman v
Governor, 448 Mich 503, 510 n 8; 533 NW2d 237 (1995), quoting 1
Official Record, Constitutional Convention 1961, pp 773-774.][24]
23
Justice CAVANAGH inconsistently argues that a tax exemption does constitute an
“accrued financial benefit” for purposes of the first clause of article 9, § 24 and therefore
cannot be impaired, but that a tax exemption does not constitute a “financial benefit” for
purposes of the second clause of article 9, § 24 and therefore need not be annually
funded.
24
In addition, Van Dusen stated:
It is not intended that an individual employee should, as a result of
this language, be given the right to sue the employing unit to require the
actuarial funding of past service benefits, or anything of that nature. What
it is designed to do is to say that when his benefits come due, he’s got a
contractual right to receive them. [1 Official Record, Constitutional
Convention 1961, p 774.]
Thus, although there was much discussion at the constitutional convention of creating a
contractual right to receive pension benefits, there was absolutely no discussion of
17
The “deferred compensation” protected as a “contractual obligation” by § 24 is the
pension payments themselves earned by the retiree, while the tax exemption is something
distinct and is not the subject of § 24.25 The tax exemption is simply a postdistribution
effect of the accrued financial benefits that have otherwise been paid in full. As the Ohio
Supreme Court explained in upholding the validity of Ohio’s decision to eliminate a
public-employee-pension-tax exemption, “there is a definite legal distinction between
reducing the rate of a pension and levying a tax upon the income received from that
pension.” Herrick v Lindley, 59 Ohio St 2d 22; 391 NE2d 729, 733 (1979). That is,
“there is a distinction between the right to receive retirement benefits unfettered by
subsequent reductions in the rate of those benefits and the right to a permanent tax
exemption.” Id.26 That there is a distinction between the right to receive retirement
creating a contractual right to tax-free pension benefits. It would seem that if the
delegates had intended to create the latter right, they would at least have mentioned this
in passing, particularly in light of the general proposition established in their new
constitution against “surrender[ing], suspend[ing] or contract[ing] away” the
Legislature’s taxing authority. Const 1963, art 9, § 2. Even more telling is the lack of
any reference to a contractual right to tax-free pension benefits in the Address to the
People. Given that neither the actual language of § 24 nor the Address to the People
mentions such a right, the ratifiers would have had absolutely no reason to suppose that,
by adopting § 24, they would be creating a contractual right to tax-free pension benefits.
25
Chairman Van Dusen also stated that § 24 “was simply designed to put pension
benefits earned in public service on the same basis as deferred compensation earned in
private employment.” 1 Official Record, Constitutional Convention 1961, p 773. Given
that the Legislature is not prohibited from taxing deferred compensation earned in private
employment, “put[ting] pension benefits earned in public service on the same basis as
deferred compensation earned in private employment” would require that there likewise
be no prohibition of the Legislature’s taxing pension benefits earned in public service.
26
See also Spradling v Colorado Dep’t of Revenue, 870 P2d 521, 524 (Colo App, 1994)
(“Because [the statute] does not reduce the amount of the pension benefits to which
plaintiffs are contractually entitled, and because there is no contractual right to an income
tax exemption for such benefits, we hold that the statute is not constitutionally invalid
insofar as it subjects those benefits to state income tax.”).
18
benefits and the right to a tax exemption is illustrated by the fact that a retiree who moves
out of Michigan is still entitled to retirement benefits but is not entitled to the tax
exemption. That a retiree cannot be deprived of retirement benefits but can be deprived
of the tax exemption underscores the fact that the “accrued financial benefit” of a pension
plan is the pension income itself, not any tax exemption that might at some moment in
time be attached to that income.27
For these reasons, reducing or eliminating the statutory exemption for public-
pension incomes as set forth in MCL 206.30 does not impair accrued financial benefits of
a “pension plan [or] retirement system of the state [or] its political subdivisions” under
Const 1963, art 9, § 24.
27
The problem with Justice HATHAWAY’s opinion is that it does not recognize this
distinction between pension benefits and tax exemptions, but treats them as being one and
the same and then summarily concludes that because pension benefits constitute an
“accrued financial benefit,” the applicable tax exemption must be one as well. It does
this with no analysis of the dispositive language “accrued financial benefit” and thus
offers no explanation for its conclusion that the tax exemption itself, as distinguished
from the pension benefits, constitutes an “accrued financial benefit.” Justice HATHAWAY
contends that we “create[] an unnecessary distinction” because “a tax is a tax, whether it
comes in the form of a direct tax increase or the elimination of a deduction.” Post at 9.
We agree that there is no significant distinction for present purposes between a tax
increase and the elimination of a deduction, and we make no such distinction. Again, the
distinction that Justice HATHAWAY misses is the one between pension benefits and tax
exemptions, not the one between a tax increase and the elimination of a deduction.
Finally, Justice HATHAWAY cites an opinion of the Attorney General for the proposition
that a tax exemption is a “financial benefit” without noting that the Attorney General
expressly stated in the same opinion that he was not answering the question that is now at
issue: “whether the Legislature may, without violating Const 1963, art 9, § 24, limit or
repeal the tax exemptions in the four retirement statutes . . . as to current retirees and
members without providing equal alternative benefits in place thereof.” OAG, 1991-
1992, No 6697, p 121 (December 18, 1991).
19
B. CONTRACTUAL OBLIGATION
The second issue contained in the Governor’s request for an advisory opinion
concerns whether reducing or eliminating the statutory tax exemption for pension
incomes as set forth in MCL 206.30 impairs a contractual obligation in violation of Const
1963, art 1, § 10 or US Const, art I, § 10(1). Const 1963, art 1, § 10 provides, “No bill of
attainder, ex post facto law or law impairing the obligation of contract shall be enacted.”
Similarly, US Const, art I, § 10(1) provides, “No State shall . . . pass any . . . Law
impairing the Obligation of Contracts . . . .” As discussed earlier, Const 1963, art 9, § 24
provides that an accrued public pension is a “contractual obligation.” However, as also
discussed earlier, “the obligation of [the] contract” specifically consists of the pension
income, not the tax exemption of that income, and thus reducing or eliminating the tax
exemption does not affect, much less impair, the obligation of the contract.
Several of the amicus curiae briefs argue that regardless of whether the tax
exemption is an “accrued financial benefit” and thus a “contractual obligation” for
purposes of Const 1963, art 9, § 24, merely by enacting a statutory tax exemption, the
Legislature created a contractual right to this exemption that cannot subsequently be
diminished without violating Const 1963, art 1, § 10. However, as this Court has
explained:
Of primary importance to the viability of our republican system of
government is the ability of elected representatives to act on behalf of the
people through the exercise of their power to enact, amend, or repeal
legislation. Therefore, a fundamental principle of the jurisprudence of both
the United States and this state is that one legislature cannot bind the power
of a successive legislature. . . .
* * *
20
Although this venerable principle that a legislative body may not
bind its successors can be limited in some circumstances because of its
tension with the constitutional prohibitions against the impairment of
contracts, thus enabling one legislature to contractually bind another, such
surrenders of legislative power are subject to strict limitations that have
developed in order to protect the sovereign prerogatives of state
governments. A necessary corollary of these limitations that has been
developed by the United States Supreme Court, and followed by this Court,
is the strong presumption that statutes do not create contractual rights.
This presumption, and its relation to the protection of the sovereign powers
of a legislature, was succinctly described by the United States Supreme
Court in [Nat’l R Passenger Corp v Atchison, T & S F R Co, 470 US 451,
465-466; 105 S Ct 1441; 84 L Ed 2d 432 (1985)]:
“For many decades, this Court has maintained that absent some clear
indication that the legislature intends to bind itself contractually, the
presumption is that ‘a law is not intended to create private contractual or
vested rights but merely declares a policy to be pursued until the legislature
shall ordain otherwise.’ . . . This well-established presumption is grounded
in the elementary proposition that the principal function of a legislature is
not to make contracts, but to make laws that establish the policy of the
state. . . . Policies, unlike contracts, are inherently subject to revision and
repeal, and to construe laws as contracts when the obligation is not clearly
and unequivocally expressed would be to limit drastically the essential
powers of a legislative body. Indeed, ‘“[t]he continued existence of a
government would be of no great value, if by implications and
presumptions, it was disarmed of the powers necessary to accomplish the
ends of its creation.”’ Thus, the party asserting the creation of a contract
must overcome this well-founded presumption, . . . and we proceed
cautiously both in identifying a contract within the language of a regulatory
statute and in defining the contours of any contractual obligation.”
[Studier, 472 Mich at 660-662 (citations omitted; emphasis added).]
Accordingly, “[i]n order for a statute to form the basis of a contract, the statutory
language ‘must be “plain and susceptible of no other reasonable construction” than that
the Legislature intended to be bound to a contract.’” Id. at 662 (citations omitted). That
is, “[b]efore a statute, particularly one relating to taxation, should be held to be
irrepealable or not subject to amendment, an intent not to repeal or amend must be so
21
directly and unmistakably expressed as to leave no reason for doubt. Otherwise the intent
is not plainly expressed.” Harsha v Detroit, 261 Mich 586, 594; 246 NW 849 (1933).
For example, “[i]f the statutory language ‘provides for the execution of a written
contract on behalf of the state the case for an obligation binding upon the state is clear.’”
Studier, 472 Mich at 662, quoting Nat’l R Passenger Corp, 470 US at 466 (citation and
quotation marks omitted). Statutes containing an express covenant not to amend the
legislation are also deemed to create contractual obligations. Studier, 472 Mich at 663.
“But, ‘absent “an adequate expression of an actual intent” of the State to bind itself,’
courts should not construe laws declaring a scheme of public regulation as also creating
private contracts to which the state is a party.” Id. at 662, quoting Nat’l R Passenger
Corp, 470 US at 466-467, quoting Wisconsin & Mich R Co v Powers, 191 US 379, 386-
387; 24 S Ct 107; 48 L Ed 229 (1903).28
As was the case in Studier, none of the statutory tax exemption provisions that are
at issue here contain any language “provid[ing] for a written contract on behalf of the
state of Michigan or even use terms typically associated with contractual relationships,
such as ‘contract,’ ‘covenant,’ or ‘vested rights.’” Studier, 472 Mich at 663-664.29 “Had
28
In Studier, 472 Mich at 668, this Court held that the statute establishing health-care
benefits for public school retirees, MCL 38.1391(1), does not create a contractual right to
receive health-care benefits because “the plain language of MCL 38.1391(1) does not
clearly indicate that the Legislature intended to surrender its legislative powers through
the statute’s enactment . . . .”
29
See, for example, the former tax exemption provision of the State Employees’
Retirement Act, MCL 38.40(1), as amended by 2002 PA 99, which provided:
The right of a person to a pension, an annuity, a retirement
allowance, any optional benefit, any other right accrued or accruing to any
person under the provisions of this act, the various funds created by this act,
22
and all money and investments and income of the funds, are exempt from
any state, county, municipal, or other local tax. [Emphasis added.]
The fact that the language “are exempt” was put in the present tense indicates that the
Legislature simply intended pension and retirement incomes to be exempt from taxation
while this statutory language remained the law. However, it does not indicate any intent
to forever prohibit a future Legislature from changing this law and making pension and
retirement incomes subject to taxation. See also Sheehy v Pub Employees Retirement
Div, 262 Mont 129, 134; 864 P2d 762, 765 (1993) (“[The statute] provides that state
retirement benefits are exempted from state tax. The use of the present tense ‘are’
indicates that the statute is a statement of current policy regarding public employment.
The statute contains no manifestation of legislative intent to create private and
enforceable contractual rights . . . ; nor does it make or imply any promises regarding
ongoing or future tax treatment of state retirement benefits.”) (italics omitted).
Similarly, the Public School Employees Retirement Act formerly provided:
A retirement allowance, an optional benefit, or any other benefit
accrued or accruing to a person under this act, the reserves created by this
act, and the money, investments, or income of those reserves are exempt
from state, county, municipal, or other local tax and subject to the public
employee retirement benefit protection act.” [MCL 38.1346(1), as
amended by 2002 PA 94 (emphasis added).]
The Michigan Legislative Retirement System Act formerly provided, “All retirement
allowances and other benefits payable under this act and all accumulated credits of
members, deferred vested members, and retirants in this retirement system are not subject
to taxation by this state or any political subdivisions of this state.” MCL 38.1057(1), as
amended by 2002 PA 97 (emphasis added). The city library employees’ retirement
system act formerly provided:
When a system of retiring allowances is adopted under the
provisions of this act, the reserve fund thereby provided shall be free from
all state, county, township, city, village and school district taxes and the
annuities payable to the members of the staff shall likewise be free from all
such taxes. [MCL 38.705, as added by 1927 PA 339.]
And the Judges Retirement Act provided, “Distributions from employer contributions
made pursuant to [MCL 38.2664(1) and (3)] and earnings on those employer
contributions, and distributions from employee contributions made pursuant to [MCL
38.2664 714(3)] and earnings on those employee contributions, are exempt from any
23
the Legislature intended to surrender its legislative powers through the creation of
contractual rights, it would have expressly done so by employing such terms.” Id. at 664.
And, as in Studier, “nowhere in the statute[s] did the Legislature covenant that it would
not amend the statute[s] to remove or diminish the obligation” in question. Id. at 665.
“Again, had the Legislature intended to surrender its power to make such changes, it
would have done so explicitly.” Id.30 “Thus, there is no indication that the Legislature
state, county, municipal, or other local tax.” MCL 38.2670(1), as amended by 2002 PA
95 (emphasis added).
Each of these acts was amended to remove the statutory exemption from state
taxes consistently with 2011 PA 38. See 2011 PA 41, 2011 PA 42, 2011 PA 43, 2011 PA
44, and 2011 PA 45. For example, as amended by 2011 PA 41, the State Employees’
Retirement Act, MCL 38.40, now provides, in relevant part:
(1) Except as otherwise provided in this section, the right of a person
to a pension, an annuity, a retirement allowance, and any optional benefit
and any other right accrued or accruing to any person under the provisions
of this act, the various funds created by this act, and all money and
investments and income of the funds are exempt from any state, county,
municipal, or other local tax.
(2) Beginning January 1, 2012, the right of a person to a pension, an
annuity, a retirement allowance, and any optional benefit, and any other
right accrued or accruing to any person under the provisions of this act, is
subject to state tax upon distribution to the person from the various funds
created by this act.
30
As this Court stated in Studier, 472 Mich at 664 n 22:
It is clear that the Legislature can use such nomenclature when it
wishes to. For instance, when enacting 1982 PA 259, which requires the
state treasurer to pay the principal of and interest on all state obligations,
the Legislature provided in MCL 12.64: “This act shall be deemed a
contract with the holders from time to time of obligations of this state.”
(Emphasis added.) Similarly, when enacting the State Housing
Development Authority Act, 1966 PA 346, the Legislature provided in
MCL 125.1434: “The state pledges and agrees with the holders of any
24
that enacted [these provisions] intended to do anything beyond . . . set forth a policy to be
pursued until one of its successor legislatures ordained a new policy.” Id. at 665-666.
Because there is no language in any of the statutory tax exemption provisions at issue
here indicating that the Legislature intended to be contractually bound by these
provisions forever, and because Const 1963, art 9, § 2 prohibits the Legislature from
contracting away its taxing authority, we conclude that the tax exemption statutes do not
create contractual rights that cannot be altered by the Legislature. Indeed, it is “well
established that a taxpayer does not have a vested right in a tax statute or in the
continuance of any tax law.” Detroit v Walker, 445 Mich 682, 703; 520 NW2d 135
(1994); see also Ludka v Dep’t of Treasury, 155 Mich App 250, 260; 399 NW2d 490
(1986) (noting that the Legislature is free to take rights that arise under a tax statute away
at any time); United States v Carlton, 512 US 26, 33; 114 S Ct 2018; 129 L Ed 2d 22
(1994) (“Tax legislation is not a promise, and a taxpayer has no vested right in the
Internal Revenue Code.”).31
notes or bonds issued under this act, that the state will not limit or alter the
rights vested in the authority to fulfill the terms of any agreements made
with the holders thereof, or in any way impair the rights and remedies of
the holders until the notes or bonds, together with the interest thereon, with
interest on any unpaid installments of interest, and all costs and expenses in
connection with any action or proceeding by or on behalf of such holders,
are fully met and discharged. The authority is authorized to include this
pledge and agreement of the state in any agreement with the holders of such
notes or bonds.” (Emphasis added.)
31
Indeed, in Carlton, 512 US at 33, the United States Supreme Court went so far as to
hold that applying an amended tax statute retroactively does not violate the United States
Constitution even when a taxpayer has “specifically and detrimentally relied on the
preamendment version” of the tax statute. It is unnecessary that we address that question
in the context of the Michigan Constitution.
25
For these reasons, reducing or eliminating the statutory tax exemption for pension
incomes as set forth in MCL 206.30 does not impair any contractual obligation in
violation of Const 1963, art 1, § 10 or US Const, art I, § 10(1). In short, we are able to
identify absolutely no provision within either constitution that provides that public
employees, and only public employees, are entitled in perpetuity to receive pension
income without having to pay taxes on that income and that such income alone will be
forever exempt from having to support the costs of government. The opposing Attorney
General contends that, come war, come natural disaster, come impending bankruptcy,
only the pension income of public employees, among all individual income, will be off-
limits from ever being used to pay the costs of government, including, significantly, the
costs of public employees themselves. The opposing Attorney General, in our judgment,
argues in behalf of a Constitution that does not exist, and we firmly reject those
arguments.
C. EQUAL PROTECTION
The third issue concerns whether determining eligibility for income-tax
exemptions on the basis of date of birth as set forth in MCL 206.30(9) violates the equal
protection of the law under Const 1963, art 1, § 2 or the Fourteenth Amendment of the
United States Constitution. Const 1963, art 1, § 2 states, in pertinent part, “No person
shall be denied the equal protection of the laws . . . .” Similarly, US Const, Am XIV, § 1
states, “[N]or shall any state . . . deny to any person within its jurisdiction the equal
26
protection of the laws.”32 “Of course, most laws differentiate in some fashion between
classes of persons.” Nordlinger v Hahn, 505 US 1, 10; 112 S Ct 2326; 120 L Ed 2d 1
(1992). Indeed, the enactment of laws that differentiate between classes of persons lies at
the heart of the legislative power. Welfare laws that apportion benefits on the basis of
income, criminal laws that establish terms of imprisonment on the basis of conduct and
criminal histories, and tax laws that take into account such circumstances of the taxpayer
as the number of children, the amount of charitable contributions, and the level of
medical expenses all differentiate among legislatively determined classes of persons.
“The Equal Protection Clause does not forbid classifications.” Id. “It simply keeps
governmental decisionmakers from treating differently persons who are in all relevant
respects alike.” Id. “As a general rule, ‘legislatures are presumed to have acted within
their constitutional power despite the fact that, in practice, their laws result in some
inequality.’” Id., quoting McGowan v Maryland, 366 US 420, 425-426; 81 S Ct 1101; 6
32
“This Court has held that Michigan’s equal protection provision is coextensive with the
Equal Protection Clause of the United States Constitution.” Shepherd Montessori Ctr
Milan v Ann Arbor Charter Twp, 486 Mich 311, 318; 783 NW2d 695 (2010).
“By this, we do not mean that we are bound in our understanding of
the Michigan Constitution by any particular interpretation of the United
States Constitution. We mean only that we have been persuaded in the past
that interpretations of the Equal Protection Clause of the Fourteenth
Amendment have accurately conveyed the meaning of Const 1963, art 1,
§ 2 as well.” [Id. at 319 n 7, quoting Harvey v Michigan, 469 Mich 1, 6
n 3; 664 NW2d 767 (2003).]
Cf. Lind v Battle Creek, 470 Mich 230, 235; 681 NW2d 334 (2004) (YOUNG, J.,
concurring) (“The Michigan Equal Protection Clause, Const 1963, art 1, § 2, unlike the
federal counterpart contained in the Fourteenth Amendment, explicitly prohibits
discrimination on the basis of race.”) (emphasis omitted).
27
L Ed 2d 393 (1961). Accordingly, the United States Supreme Court has made it “clear
that, unless a classification warrants some form of heightened review because it
jeopardizes exercise of a fundamental right or categorizes on the basis of an inherently
suspect characteristic, the Equal Protection Clause requires only that the classification
rationally further a legitimate state interest.” Nordlinger, 505 US at 10.33 This is known
as the “rational basis” standard. Any less deferential standard of review would transform
this Court into a body in which review, and reversal, of the judgments of the Legislature
would become increasingly routine given the ordinary incidence of laws in which the
Legislature has established classifications among persons.
The opposing Attorney General argues that a heightened standard of review--
specifically, strict scrutiny-- is required because there is a constitutional right to a tax-free
pension. But, of course, this Court has determined this proposition to the contrary. For
the reasons discussed with regard to the first two issues, there is no constitutional right to
a tax-free pension. There is no right on the part of public employees, alone among all
persons, to such a benefit. Furthermore, even if there were such a constitutional right, not
all constitutional rights warrant application of the strict-scrutiny standard, only those that
are considered “fundamental rights,” i.e., those rights “traditionally protected by our
society” and “implicit in the concept of ordered liberty.” Phillips, 470 Mich at 434
33
The corollary of this is that “[f]or a decision to be subject to [strict] scrutiny, it must be
a classification that is based on ‘suspect’ factors such as race, national origin, ethnicity,
or a ‘fundamental right.’” Phillips, 470 Mich at 432 (citations omitted); see also
Massachusetts Bd of Retirement v Murgia, 427 US 307, 312; 96 S Ct 2562; 49 L Ed 2d
520 (1976) (“[E]qual protection analysis requires strict scrutiny of a legislative
classification only when the classification impermissibly interferes with the exercise of a
fundamental right or operates to the peculiar disadvantage of a suspect class.”).
28
(citations and quotation marks omitted). The right to a tax-free pension has never been
held to be a constitutional right, much less a fundamental right.34
It is uncontested that the classification at issue here does not involve a suspect
class because age has never been held to constitute such a class. Massachusetts Bd of
Retirement v Murgia, 427 US 307, 314; 96 S Ct 2562; 49 L Ed 2d 520 (1976) (“Even if
the statute could be said to impose a penalty upon a class defined as the aged, it would
not impose a distinction sufficiently akin to those classifications that we have found
suspect to call for strict judicial scrutiny.”); Kimel v Florida Bd of Regents, 528 US 62,
83; 120 S Ct 631; 145 L Ed 2d 522 (2000) (“[A]ge is not a suspect classification under
the Equal Protection Clause. States may discriminate on the basis of age without
offending the Fourteenth Amendment if the age classification in question is rationally
related to a legitimate state interest.”) (citations omitted). Because the classification at
issue here does not pertain to either a fundamental right or a suspect class, the rational-
34
The opposing Attorney General also argues that differential treatment on the basis of
marital status requires a higher level of scrutiny. However, marital status classifications
have never been accorded any heightened scrutiny under the Equal Protection Clause.
See Smith v Shalala, 5 F3d 235, 239 (CA 7, 1993) (“Because [a] classification based on
marital status does not involve a suspect class . . . , we must examine it under the rational
basis test.”), cert den 510 US 1198 (1994); Zablocki v Redhail, 434 US 374, 403; 98 S Ct
673; 54 L Ed 2d 618 (1978) (Stevens, J., concurring) (“When a state allocates benefits or
burdens, it may have valid reasons for treating married and unmarried persons differently.
Classification based on marital status has been an accepted characteristic of tax
legislation, Selective Service rules, and Social Security regulations.”). There is a rational
basis for allowing an individual who otherwise would not receive the pension exemption
to receive it if his or her spouse was born before 1946. Married persons plan for their
financial futures together, and when one spouse cannot easily adjust to or absorb changes
in a tax law because of his or her age, the other spouse necessarily shares in that burden.
The marital-status distinction rationally furthers the state’s legitimate interest in
protecting the reasonable reliance interests of both retirees and their spouses.
29
basis standard is applicable. “[B]ecause an age classification is presumptively rational,
the individual challenging its constitutionality bears the burden of proving that the ‘facts
on which the classification is apparently based could not reasonably be conceived to be
true by the governmental decisionmaker.’” Kimel, 528 US at 84, quoting Vance v
Bradley, 440 US 93, 111; 99 S Ct 939; 59 L Ed 2d 171 (1979).
The rational-basis standard is “a relatively relaxed standard reflecting the Court’s
awareness that the drawing of lines that create distinctions is peculiarly a legislative task
and an unavoidable one.” Murgia, 427 US at 314. “Perfection in making the necessary
classifications is neither possible nor necessary.” Id. “Such action by a legislature is
presumed to be valid.” Id. Therefore, under the rational-basis standard, “‘courts will
uphold legislation as long as that legislation is rationally related to a legitimate
government purpose.’” Phillips, 470 Mich at 433, quoting Crego v Coleman, 463 Mich
248, 259; 615 NW2d 218 (2000). “The rational basis test does not test ‘the wisdom,
need, or appropriateness of the legislation . . . .’” Phillips, 470 Mich at 434, quoting
Crego, 463 Mich at 260. Instead, “[t]his highly deferential standard of review requires a
challenger to show that the legislation is ‘arbitrary and wholly unrelated in a rational way
to the objective of the statute.’” Phillips, 470 Mich at 433, quoting Crego, 463 Mich at
259, quoting Smith v Employment Security Comm, 410 Mich 231, 271; 301 NW2d 285
(1981).
“This standard is especially deferential in the context of classifications made by
complex tax laws.” Nordlinger, 505 US at 11. “‘[I]n structuring internal taxation
schemes “the States have large leeway in making classifications and drawing lines which
in their judgment produce reasonable systems of taxation.”’” Id., quoting Williams v
30
Vermont, 472 US 14, 22; 105 S Ct 2465; 86 L Ed 2d 11 (1985), quoting Lehnhausen v
Lake Shore Auto Parts Co, 410 US 356, 359; 93 S Ct 1001; 35 L Ed 2d 351 (1973); see
also Regan v Taxation with Representation of Washington, 461 US 540, 547; 103 S Ct
1997; 76 L Ed 2d 129 (1983) (“Legislatures have especially broad latitude in creating
classifications and distinctions in tax statutes.”). Indeed, “‘in taxation, even more than in
other fields, legislatures possess the greatest freedom in classification.’” San Antonio
Indep Sch Dist v Rodriguez, 411 US 1, 41; 93 S Ct 1278; 36 L Ed 2d 16 (1973), quoting
Madden v Kentucky, 309 US 83, 88; 60 S Ct 406; 84 L Ed 590 (1940). Given “‘[t]he
broad discretion as to classification possessed by a legislature in the field of taxation
[that] has long been recognized . . . , the presumption of constitutionality can be
overcome only by the most explicit demonstration that a classification is a hostile and
oppressive discrimination against particular persons and classes . . . .’” San Antonio
Indep Sch Dist, 411 US at 40-41, quoting Madden, 309 US at 87-88.35 “‘The burden is
on the one attacking the legislative arrangement to negative every conceivable basis
which might support it.’” Lehnhausen, 410 US at 364, quoting Madden, 309 US at 88.
In this case, there is a rational basis for grounding a taxpayer’s eligibility for the
pension exemption upon date of birth: older persons, who are obviously more likely to be
already retired or approaching retirement, have relied more on the exemption and will be
less able to garner additional future income to offset the loss of the exemption. The
United States Supreme Court “has acknowledged that classifications serving to protect
35
“‘[T]he passage of time has only served to underscore the wisdom of that recognition
of the large area of discretion which is needed by a legislature in formulating sound tax
policies.’” San Antonio Indep Sch Dist, 411 US at 40, quoting Madden, 309 US at 88.
31
legitimate expectation and reliance interests do not deny equal protection of the laws.”
Nordlinger, 505 US at 13.36 Indeed, “‘[t]he protection of reasonable reliance interests is
not only a legitimate governmental objective: it provides an exceedingly persuasive
justification . . . .’” Id., quoting Heckler v Mathews, 465 US 728, 746; 104 S Ct 1387; 79
L Ed 2d 646 (1984). Recognizing that older individuals may have a “diminishing earning
capacity” also constitutes an altogether legitimate reason for basing eligibility for the
pension exemption on age. Cruz v Chevrolet Grey Iron Div of Gen Motors Corp, 398
Mich 117, 133-134 (opinion by COLEMAN, J.), 137-138 (opinion by LEVIN, J.); 247
NW2d 764 (1976) (holding that the “diminishing earning capacity” of older workers
constitutes a rational basis for the provision in the Worker’s Disability Compensation
Act, MCL 418.357, that provides for reduction in compensation payments to employees
over the age of 65).37
36
There is an obvious distinction between this Court’s recognition that older employees
may have relied on an expectation of a certain level of pension, and even on a tax-free
pension, and holding that these employees possess a constitutional right to such an
exemption. The former implicates a matter of public policy, and the latter implicates a
matter of constitutional law.
37
We also reject the opposing Attorney General’s argument that because 2011 PA 38
creates closed classes-- that is, it stratifies groups by date of birth and not merely by age,
thereby prohibiting new members from joining the more favorably treated group as they
themselves age-- it is a capriciously designed system. To the contrary, there is a rational
basis for this: the state is attempting to phase out the availability of the broadest
exemptions and deductions for pension incomes altogether. While the legislation is
designed to protect older pensioners who have greater reliance on the pre-2011 PA 38 tax
rules, the key protection built in to the stratified system is from the changes immediately
occurring in the tax code in 2012. That is, the Legislature has determined that it is not
necessary to protect pensioners progressively as they age because the younger pensioners
are at the time of the changes in 2012, the better they will be able to anticipate and plan
for their tax liability when they retire. The primary goal, which the stratified system
achieves at a more gradual pace, is to equalize the tax burden among Michigan citizens,
by means of having public pensioners share to a greater extent in the cost of government
from the income they are continuing to earn in retirement. Whether we agree or disagree
32
For these reasons, determining eligibility for income-tax exemptions on the basis
of age or date of birth as set forth in MCL 206.30(9) does not violate the equal protection
of the law under Const 1963, art 1, § 2 or the Fourteenth Amendment of the United States
Constitution.38
D. GRADUATED INCOME TAX
The final issue concerns whether determining eligibility for income-tax
exemptions and deductions on the basis of total household resources as set forth in MCL
206.30(7) and (9) creates a graduated income tax in violation of Const 1963, art 9, § 7.
Const 1963, art 9, § 7 provides, “No income tax graduated as to rate or base shall be
imposed by the state or any of its subdivisions.” A graduated income tax is generally
understood to be a tax on income that imposes a proportionately greater tax burden on the
earnings of higher-income taxpayers than on that of lower-income taxpayers.39 Const
1963, art 9, § 7 prohibits both an income tax graduated as to rate and an income tax
graduated as to base. It is uncontested by the parties that the provisions at issue here do
not create an income tax graduated as to “rate” because all individual taxpayers will be
required to pay a flat 4.35 percent income tax. Instead, the issue is whether the
provisions create an income tax graduated as to “base” because only certain taxpayers,
with these policy determinations, there exists a rational basis to support the system
designed by the Legislature to accomplish this goal, and thus it is neither capricious nor
arbitrary.
38
All seven justices agree that there is no equal protection violation.
39
See OAG, 1965-1966, No 4428, p 53 (March 31, 1965) (“[T]he result forbidden by the
Constitution is the imposition of a proportionately greater income tax burden on the
income of high income groups than on that of low income tax groups.”).
33
depending on their income levels, will be entitled to the personal exemption and to the
$20,000 or $40,000 deduction.
It is also uncontested that a taxpayer’s “base” consists of his or her net taxable
income and that exemptions and deductions reduce a taxpayer’s base by reducing the
amount of a taxpayer’s income subject to taxation.40 That is, if a taxpayer is entitled to
an exemption or deduction, his or her base is reduced, and if a taxpayer is not entitled to
an exemption or deduction, his or her base is not reduced. Concomitantly, an income-
based deduction or exemption is one to which taxpayers are, or are not, entitled as a
function of their incomes. Traditionally, in a progressive or graduated tax system,
taxpayers with lower incomes are allowed the exemption or deduction, while taxpayers
with higher incomes are deprived of the exemption or deduction in order to create
graduation. Consequently, everything else being equal, taxpayers with higher incomes
will have disproportionately larger bases than taxpayers with lower incomes because a
higher proportion of their income is included in their base. Therefore, income-based
exemptions and deductions result in an income tax that is graduated as to base, which can
occur even when all income is taxed at a flat rate.41 This is exactly what the ratifiers of
40
See Black’s Law Dictionary (6th ed), which defines “tax deduction” as “[a] subtraction
from gross income in arriving at taxable income” and defines “tax exemption” as
“[i]mmunity from the obligation of paying taxes in whole or in part.” “Tax deductions
are technically different from tax exemptions, but the effect of both is to reduce gross
income in computing taxable income.” Black’s Law Dictionary (5th ed), p 1310.
41
It is not in dispute that the Legislature can enact nonincome-based exemptions and
deductions even though such exemptions and deductions may have the incidental effect
of creating different effective tax rates. See the Address to the People, which specifically
states that “[t]he legislature could prescribe reasonable exemptions for a flat rate tax.” 2
Official Record, Constitutional Convention 1961, p 3399. Accordingly, the supporting
Attorney General’s point that there are already numerous nonincome-based exemptions
34
our Constitution explicitly prohibited by adopting § 7, which provides, “No income tax
graduated as to . . . base shall be imposed by the state . . . .”42 We do not believe that the
ratifiers could have been any clearer in their intent to prohibit a graduated income tax,
and we believe that the statutory provisions at issue here create such a prohibited tax.
MCL 206.30(7) conditions a taxpayer’s entitlement to the personal exemption on
his or her income. If a taxpayer’s income is less than $75,000 for a single return or
$150,000 for a joint return, the taxpayer is fully entitled to the $3,700 personal
exemption. However, if a taxpayer’s income is between $75,000 and $100,000 for a
single return or between $150,000 and $200,000 for a joint return, the taxpayer is only
entitled to a declining proportion of the exemption, and this proportion depends entirely
on the extent to which the taxpayer’s income exceeds the threshold levels of $75,000 for
a single return or $150,000 for a joint return.43 Finally, if a taxpayer’s income exceeds
in Michigan law is not germane to what is at issue here, i.e., whether income-based
exemptions and deductions violate Const 1963, art 9, § 7.
42
The supporting Attorney General argues that Const 1963, art 9, § 7 only prohibits an
income tax in which, as this Court stated in Kuhn v Dep’t of Treasury, 384 Mich 378,
388-389; 183 NW2d 796 (1971), “different rates of tax [are applied to] different
segments of taxable income of the person being taxed.” However, this argument takes
that statement from Kuhn out of context. Kuhn also held that the act at issue does not
violate § 7 because “[t]he rates of tax imposed by the Act are uniformly applicable to all
taxable income of every taxpayer in each class” and “ [t]he credits for property and
income taxes are allowed against the tax liability of all taxpayers without regard to their
income.” Id. at 389 (citation and quotation marks omitted; emphasis added). This
language clearly demonstrates that Kuhn recognized that treating different taxpayers
differently on the basis of their income could well run afoul of § 7.
43
More specifically, MCL 206.30(7) provides, in pertinent part:
For a taxpayer whose total household resources are $75,000.00 or
more for a single return or $150,000.00 or more for a joint return, the
personal exemption allowed under [MCL 206.30(2)] shall be adjusted by
35
$100,000 for a single return or $200,000 for a joint return, the taxpayer is not entitled to
any portion of the $3,700 personal exemption. This “phase-out” of the personal
exemption creates an income tax graduated as to base because entitlement to the
exemption-- and the extent of such entitlement, which reduces the taxpayer’s base-- is
entirely dependent on the taxpayer’s income level.44 To the extent that MCL 206.30(7)
multiplying the exemption for the tax year for a single return by a fraction,
the numerator of which is $100,000.00 minus the taxpayer’s total
household resources, and the denominator of which is $25,000.00, and for a
joint return by a fraction, the numerator of which is $200,000.00 minus the
taxpayer’s total household resources, and the denominator of which is
$50,000.00.
44
Phase-outs have been commonly recognized as a means of creating a graduated or
“progressive” income tax. See, e.g., Schuyler, Phase-Outs Are Bad Tax Policy, Institute
for Research on the Economics of Taxation Economic Policy Bulletin No. 71, January
1998, p 4 (“Phase-outs . . . heighten tax
progressivity.”) (accessed October 31, 2011); Viard, The Tax Code’s Burdens on
Families and Individuals, American Enterprise Institute for Public Policy Research, April
13, 2011 (“Phase-outs add to the progressivity of
the tax system by raising taxes on those with higher incomes through the reduction or
elimination of selected tax preferences. Like other measures that promote progressivity,
phase-outs also increase the effective marginal tax rates faced by taxpayers.”) (accessed
October 31, 2011); A Stealth Tax Hike, Wall St J, June 29, 2011 (“The idea is that
once taxpayers earn a certain amount of money . . . they would begin to lose the value of
the various deductions they’re entitled to under the law. . . . Earn enough money and
soon the value of those deductions goes to zero. The political point of this exercise is to
raise marginal tax rates without appearing to do so. . . . The phase-out gambit is an
attempt to shoe-horn more progressivity into the tax code without admitting it, and to do
so in such a way that only tax experts will know what’s going on.”) (accessed October
31, 2011); Mitchell, Lowering Marginal Tax Rates: The Key to Pro-Growth Tax Relief,
The Heritage Foundation, May 22, 2001 (“Known as ‘phase-outs,’ these provisions withdraw
certain tax benefits in the code when income reaches a certain level. Phase-outs have the
effect of raising marginal tax rates by reducing the amount of money that can be deducted
(or credited or exempted) from taxable income.”) (accessed October 31, 2011); National
Commission on Restructuring the Internal Revenue Service, A Vision for a New IRS, June
25, 1997, Appendix H, p 36 (“[P]hase-
36
conditions a taxpayer’s entitlement to the personal exemption on his or her income, it is
an income tax graduated as to base45 and plainly violative of Const 1963, art 9, § 7.46
With regard to the $20,000/$40,000 deduction, MCL 206.30(9) conditions a
taxpayer’s entitlement to the $20,000 deduction for a single return or $40,000 deduction
for a joint return on his or her income. If a taxpayer’s income is $75,000 or less for a
single return or $150,000 or less for a joint return, the taxpayer may be entitled to the
outs are intended to increase progressivity by increasing the tax burden of higher income
taxpayers . . . .”) (accessed October 31, 2011).
45
The supporting Attorney General argues that this is not true because the taxpayer’s
entitlement to the exemption is conditioned on the taxpayer’s “total household
resources,” not on his or her income as defined by federal adjusted gross income (AGI).
Given that the term “total household resources” is defined as including “all income
received by all persons of a household in a tax year while members of a household,”
MCL 206.508(4) (emphasis added), we are unpersuaded by this argument. That this
definition differs from the federal definition of “income” is also of no consequence
because federal AGI is not the only proxy for income. “Income” can be defined on the
margins in many different ways and still be recognizable as such. Accordingly, when the
supporting Attorney General argues merely that “total household resources” is calculated
differently from AGI or even “taxable income” as defined in MCL 206.30(1), this does
not show that the concept of “total household resources” differs qualitatively from the
concept of income. The Legislature cannot avoid the constitutional prohibition of a
graduated income tax by simply replacing the term “income” with the term “total
household resources” when these two terms are largely equivalent. That one term may
include some forms of income that the other does not does not alter the fact that both
terms are still at their core referring to income.
46
The supporting Attorney General’s answer to the following question suggests what
would be left of the Constitution’s prohibition against a graduated income tax if his
arguments on income-based phase-outs prevailed:
Justice Markman: [I]s it your argument that . . . akin to the
alternative minimum tax which we have in the federal system, the
Legislature could phase-out whatever deductions or exemptions it wanted
to, [it] could phase them out at whatever rate of acceleration it wanted to,
and it could phase them out completely at whatever low level it wanted to,
and not be in violation of art 9, § 7.
Supporting Attorney General: That is correct.
37
$20,000/$40,000 deduction. However, if the taxpayer’s income exceeds $75,000 for a
single return or $150,000 for a joint return, the taxpayer is not entitled to the
$20,000/$40,000 deduction. This $75,000/$150,000 income limitation creates an income
tax graduated as to base because entitlement to the $20,000/$40,000 deduction, which
reduces a taxpayer’s base, is entirely a function of the taxpayer’s income level. Once
again, to the extent that MCL 206.30(9) conditions a taxpayer’s entitlement to the
$20,000/$40,000 deduction on his or her income, it is an income tax graduated as to base
and plainly violative of Const 1963, art 9, § 7.47
47
To illustrate how 2011 PA 38 creates a graduated base by conditioning the receipt of
the personal exemption on a taxpayer’s income, consider the following individual
taxpayers each taxed at a flat rate:
Income Pre-38 Exemption Tax Base PA 38 Exemption PA 38 Tax Base
$10,000 3,600 6,400 3,600 6,400
$50,000 3,600 46,400 3,600 46,400
$87,500 3,600 83,900 1,800 85,700
$100,000 3,600 96,400 0 100,000
The personal exemption is tied to inflation: in 2010 it was set at $3,600; in 2011, it will
be $3,700. The exemption is kept constant here for demonstration purposes. Under the
pre-2011 PA 38 exemption, every taxpayer receives a $3,600 personal exemption off the
top of household income, and thus each taxpayer’s base is reduced by the set amount
irrespective of income. However, 2011 PA 38 alters the personal exemption system by
phasing out the personal exemption at $75,000 and completely eliminating it at $100,000.
Thus, the two right columns on the chart illustrate how the current income tax exemption
would be affected by the new income-dependent provisions and how the exemption
phase-out is precisely the kind of graduated income tax base that the Constitution
prohibits: the two highest earners illustrated have larger tax bases on which they must pay
the flat 4.35 percent tax rate, and their tax bases are larger to the extent that the
exemption does not apply to them for no other reason than their higher incomes. By
basing an income exemption solely on income, 2011 PA 38 effectively delays the point
from which the tax clock will begin to run on income for some, but not all, taxpayers.
Accordingly, it is contrary to a flat-tax system.
The $20,000 deduction employs a similar graduated structure by eliminating the
ability to claim the deduction for earners who make more than $75,000. The only notable
38
The supporting Attorney General argues that the “base” language only prohibits
taxation that is piggybacked on the federal tax liability. In support of this argument, he
cites the Address to the People, which stated, in pertinent part:
This is a new section making it clear that neither the state nor any
local unit of government may impose a graduated income tax. The words
“or base” are necessary to prevent “piggyback” taxation based on the
federal tax liability. Without such language, a tax nominally imposed at a
flat rate might actually adopt all of the graduation of the federal tax. [2
Official Record, Constitutional Convention 1961, p 3399.]
This language certainly does indicate that one purpose of using the term “base” was to
prevent piggyback taxation, in which tax graduation is achieved by means of imposing a
state income tax defined in terms of a particular percentage of the graduated federal
income tax. However, nothing in the Address-- and, even more significantly, nothing in
the text of the Constitution itself-- suggests that this was the only intended purpose of
using “base.” The necessary implication of the supporting Attorney General’s argument
is that the constitutional ratifiers intended to prohibit one, and only one, specific means of
creating a graduated base, while permitting all other means of creating a graduated base.
We do not believe that such an implication can fairly be drawn from a provision of the
difference between the two is that instead of providing a phase-out as the personal
exemption does, it employs a “cliff” whereby as soon as an individual taxpayer earns
more than $75,000, he or she loses the entire deduction. Thus, this also impermissibly
conditions the receipt of a deduction affecting tax base on income criteria, thereby again
creating impermissible graduation. Within the range in which both the exemption and the
deduction would be phased out and/or eliminated ($75,000-$100,000), earners with
pension income would incur the highest marginal tax rates by far under the statute-- the
closer their earnings to the lower figure, the higher their rate.
39
Constitution that states, “No income tax graduated as to . . . base” shall be imposed by the
state. Const 1963, art 9, § 7 (emphasis added).
This Court’s understanding of the “base” language was also expressed by the
delegates during the constitutional convention debates. For example, Delegate Van
Dusen explained:
Without the words “or base” you do not really have any protection
against an indirectly graduated state income tax, because a flat rate tax
imposed upon the federal tax liability would simply pick up all of the
graduation of the federal liability. Without these words “or base” there is
no question but what in my judgment a nominally flat rate tax could be
made a graduated income tax. [1 Official Record, Constitutional
Convention 1961, p 894 (emphasis added).]
That the delegates understood their new constitutional provision to prohibit the
imposition of a graduated income tax, directly or indirectly, is clear. As Delegate Van
Dusen further explained:
The prohibition against the graduated income tax with which we are
now dealing is one which has not been in our constitution up until now
largely because the evil of the graduated income tax has not been as
apparent until the last twenty years. The progressivity, the steep graduation
of our federal system has taught us that this is a problem, and if there is to
be some balance in our total tax structure—all of us, after all, are federal
taxpayers as well as state taxpayers—this is a limitation which we as
citizens of this state may reasonably impose upon our legislature. [Id. at
879-880.]
And Delegate Henry Woolfenden explained:
This country has been built, in my judgment, in my conviction,
because of equality of opportunity and not because of legislative equality.
If we want to make equal by legislation, then we should join some socialist
government; but I am in favor of equality of opportunity, and I think a
graduated income tax which says if my next door neighbor earns twice as
much money as I do that he should not pay twice as much, he should pay 4
times as much, is essentially an immoral tax. I am absolutely opposed to
it . . . . I do not believe we are hamstringing the legislature; I think we are
40
merely stating the American philosophy of free enterprise and equality of
opportunity. [Id. at 888.][48]
And Delegate O. Lee Boothby explained:
There are 2 uses of taxes. The one use is to take care of the
legitimate needs of government and that is the legitimate use, and the other
use that has been seized upon by some people is to use taxation for the
principle of distributing wealth. This is what I call a Robin Hood style of
government where you take it from the rich and give it to the poor. I do not
believe this is the legitimate purpose of taxation and I feel that it is
necessary to write into the constitution a prohibition against a government
adopting this theory of taking it from the rich and distributing it and
leveling all people to the same status in society.
* * *
. . . I thought it was most interesting to note that 2,300 years ago the
Greeks tried the so called progressive income tax—and there is nothing
progressive about an income tax, it was tried 2,300 years ago by the
Greeks, and a leading scholar of that day, Socrates, made this comment; he
said:
“It would appear that success is to be punished; that exorbitant taxes
have made it a crime for man to prosper. The end result of such order can
only be removal of incentive, the discouragement of our people and the
destruction of our free society.”
When a few years later the Spartans came and attacked Athens, the
Greeks did not seem to feel they had anything to fight for. [Id. at 890.]
Regardless of whether one today agrees or disagrees with the reasoning of the delegates
in adopting Const 1963, art 9, § 7, one thing is clear: the delegates’ understanding of this
constitutional provision was that it would prohibit a graduated income tax, plain and
simple,49 and there is nothing whatsoever in the express language of this provision that
48
The constitutional convention record indicates that an applause followed this statement
and that several other delegates expressed their agreement.
49
Given the rationale so clearly expressed by delegates in support of the prohibition of a
graduated income tax, there is no conceivable reason why they would have been any less
41
would suggest in any way that the ratifiers’ understanding was any different. Indeed, it is
hard to identify any significant provision of the Michigan Constitution that is more
explicit and more straightforward than Const 1963, art 9, § 7.50
This clarity undoubtedly explains Attorney General Frank Kelley’s understanding
of § 7 in 1965:
The term “graduated rate” was used in reference to the Federal
income tax rate structure. . . . The base restriction was to prohibit
graduation by indirection. . . .
* * *
Graduation as to base means producing the effect of a tax graduated
as to rate by reducing the tax base for lower incomes and increasing it for
higher incomes received by a particular class of taxpayers within a tax
period. In either instance, the result forbidden by the Constitution is the
imposition of a proportionately greater income tax burden on the income of
high income groups than on that of low income tax groups. Granting of a
deduction and/or applying a uniform rate to all in a class is valid so long as
the classification is reasonable and is not made in reference to the amount
of income received in a tax period. [OAG, 1965-1966, No 4428, pp 52-53
(March 31, 1965) (emphasis added).]
concerned about a graduated income tax that is created directly by conditioning eligibility
for deductions and exemptions on taxpayers’ income levels than they would have been
about a graduated income tax that is created indirectly by imposing an income tax defined
in terms of a particular percentage of the undeniably graduated federal income tax.
50
It is also interesting to note that the people of this state have rejected, in substantial
numbers, three efforts to repeal the prohibition against a graduated income tax in Const
1963, art 9, § 7. See Citizens Research Council, Amending the Michigan Constitution:
Trends and Issues, No 360-03 at 8 (March, 2010) (accessed November 1, 2011). A 1968 repeal proposal was
rejected by 76.7 percent of the voters; a 1972 repeal proposal was rejected by 68.7
percent of the voters; and a 1976 repeal proposal was rejected by 72.2 percent of the
voters. See Michigan Department of State, Initiatives and Referendums under the
Constitution of the State of Michigan of 1963, December 5, 2008 (accessed November
1, 2011).
42
Furthermore, this is also the understanding of § 7 adopted by this Court. In Kuhn
v Dep’t of Treasury, this Court held that tax credits for property tax and city income tax
liability did not violate Const 1963, art 9, § 7 because, as the Court of Appeals had
explained,
“[t]he credits for property and income taxes are allowed against the tax
liability of all taxpayers without regard to their income. The limitations
upon the amounts of credits that may be claimed by a taxpayer are not
based upon the taxpayer’s income; the effect is not to impose a tax
violative of the constitutional prohibition against a tax graduated as to rate
or base.” [Kuhn v Dep’t of Treasury, 384 Mich 378, 389; 183 NW2d 796
(1971), quoting Kuhn v Dep’t of Treasury, 15 Mich App 364, 371; 166
NW2d 697 (1968) (emphasis added).]
That this Court focused on the fact that a taxpayer’s entitlement to the credits was not
determined by the taxpayer’s income-- and ultimately upheld the credits-- suggests that it
may have believed that basing a taxpayer’s entitlement to a credit on his or her income
might run afoul of Const 1963, art 9, § 7.51 Thus, the implication of this Court’s
reasoning in Kuhn is that the Court believed that an income-based credit might be a “tax
violative of the constitutional prohibition against a tax graduated as to rate or base.”
Indeed, in Butcher v Dep’t of Treasury, we recognized that “by closely examining
the credits, exclusions, and exemptions . . . challenged [in Kuhn], we at least implied that
a constitutional violation can occur by the use of income criteria for determining their
amounts” and that “‘[t]he dispositive question [was] whether the credit at issue indirectly
creates a progressive or graduated income tax rate.’” Butcher v Dep’t of Treasury, 425
51
See also Rosenbaum v Dep’t of Treasury, 77 Mich App 332, 336; 258 NW2d 216
(1977) (“Once the credit is computed it is allowed without regard to the taxpayer’s
income. Therefore, it does not create either directly or indirectly a graduated tax rate or
base.”) (emphasis added).
43
Mich 262, 273-274; 389 NW2d 412 (1986), quoting Butcher v Dep’t of Treasury, 141
Mich App 116, 121; 366 NW2d 15 (1984) (emphasis in the original). We held that the
credit at issue, i.e., the property-tax credit, did not create a graduated income tax even
though it was income-dependent because it was “in effect a property tax rebate that
employs the income tax as a vehicle for its reconciliation” and, thus, “art 9, § 7, which is
concerned only with income taxes, [was] inapplicable . . . .” Butcher, 425 Mich at 276
(emphasis added).52 We reached this conclusion because “‘a property taxpayer may file
for this property tax rebate and receive such a rebate even if the computed rebate exceeds
the amount of income taxes the property taxpayer might owe or even if the property
taxpayer has no state income tax liability whatsoever.’” Id. at 274, quoting Butcher, 141
Mich App at 122. Unlike the property-tax credit at issue in Butcher, it is uncontested that
the income-tax exemptions and deductions at issue in the instant case are clearly income
taxes. The only question is whether they are graduated income taxes and, for the reasons
explained above, we conclude that they are.
We conclude that determining eligibility for income-tax exemptions and
deductions on the basis of total household resources as set forth in MCL 206.30(7) and
(9) creates a graduated income tax in violation of Const 1963, art 9, § 7.53
52
More specifically, the issue involved an amendment of an already existing local
property tax credit that reduced this credit by 10 percent for each $1,000 of household
income in excess of $65,000.
53
All seven justices agree that MCL 206.30(7) and (9) create a graduated income tax in
violation of Const 1963, art 9, § 7.
44
E. SEVERABILITY
Pursuant to MCL 8.5, these portions of 2011 PA 38, in our judgment, can be
severed from the remainder of the act, which is constitutional with respect to all the
issues raised.54 MCL 8.5 provides:
In the construction of the statutes of this state the following rules
shall be observed, unless such construction would be inconsistent with the
manifest intent of the legislature, that is to say:
If any portion of an act or the application thereof to any person or
circumstances shall be found to be invalid by a court, such invalidity shall
not affect the remaining portions or applications of the act which can be
given effect without the invalid portion or application, provided such
remaining portions are not determined by the court to be inoperable, and to
this end acts are declared to be severable.
This Court has long recognized that “[i]t is the law of this State that if invalid or
unconstitutional language can be deleted from an ordinance and still leave it complete
and operative then such remainder of the ordinance be permitted to stand.” Eastwood
Park Amusement Co v East Detroit Mayor, 325 Mich 60, 72; 38 NW2d 77 (1949). The
only unconstitutional portions of the act at issue here are those that ground eligibility for
the personal exemption and for the $20,000/$40,000 deduction on the taxpayer’s income.
We are convinced that severing these unconstitutional provisions is not
inconsistent with the manifest intent of the Legislature. MCL 8.5. First, there is no
indication in the act that the drafters of 2011 PA 38 intended a different severability rule
54
At oral argument, the supporting Attorney General, i.e., the attorney representing the
position of the Governor and the Legislature, indicated that if this Court were to conclude
that portions of the act are unconstitutional-- as we now do-- the remedy would be to
sever the unconstitutional portions of the act while preserving intact the remainder of the
act.
45
than MCL 8.5 to apply. Second, this is the remedy expressly requested by the supporting
Attorney General, who represents the views of a majority of the Legislature. And third, it
seems clear to this Court that the Legislature “would have passed the statute had it been
aware that portions therein would be declared to be invalid and, consequently, excised
from the act.” Pletz v Secretary of State, 125 Mich App 335, 375; 336 NW2d 789
(1983); see also Eastwood Park Amusement, 325 Mich at 73 (stating the general rule that
unconstitutional provisions may be severed even absent a severability clause if, among
other conditions, “it is clear from the ordinance itself that it was the intent of the
legislature to enact these provisions irrespective of the others”) (citation and quotation
marks omitted). As the Legislature stated in the title of the act, 2011 PA 38 is “[a]n act to
meet deficiencies in state funds . . . .” The language limiting the personal exemption and
the $20,000/$40,000 deduction are but two ways in which the Legislature has sought to
accomplish this goal. Although the extent to which 2011 PA 38 addressed “deficiencies
in state funds” will be diminished to a small degree as the result of the severance, what
will remain nonetheless enables the Legislature to realize its stated objectives. As the
result of severance, the estimated level of revenues from 2011 PA 38 will be reduced
from $1.4237 billion in fiscal year 2012-2013 to $1.3325 billion, a reduction of 6.4
percent.55 We believe that, had the Legislature “been aware that portions [of 2011 PA
38] would be declared to be invalid and, consequently, excised from the act,” Pletz, 125
Mich App at 375, it would nonetheless have enacted the remainder of this statute.
55
See House Legislative Analysis, HB 4361 & 4362, June 8, 2011, p 11.
46
In addition, we are convinced that the remainder of the act can be given effect
without the invalid portions. See MCL 8.5. When the unconstitutional language is
severed, what remains is complete in and of itself, logical in its formulation and
organization, and clearly in furtherance of the Legislature’s stated goal of addressing
“deficiencies in state funds.”
In view of what we perceive to be the Legislature’s intentions, and because
severing the invalid portions does not render the remaining portions of 2011 PA 38
“inoperable,” MCL 8.5, we sever the unconstitutional portions of MCL 206.30 as
follows:
(7) For each tax year beginning on and after January 1, 2013, the
personal exemption allowed under subsection (2) shall be adjusted by
multiplying the exemption for the tax year beginning in 2012 by a fraction,
the numerator of which is the United States consumer price index for the
state fiscal year ending in the tax year prior to the tax year for which the
adjustment is being made and the denominator of which is the United States
consumer price index for the 2010-2011 state fiscal year. The resultant
product shall be rounded to the nearest $100.00 increment. As used in this
section, “United States consumer price index” means the United States
consumer price index for all urban consumers as defined and reported by
the United States department of labor, bureau of labor statistics. For each
tax year, the exemptions allowed under subsection (3) shall be adjusted by
multiplying the exemption amount under subsection (3) for the tax year by
a fraction, the numerator of which is the United States consumer price
index for the state fiscal year ending the tax year prior to the tax year for
which the adjustment is being made and the denominator of which is the
United States consumer price index for the 1998-1999 state fiscal year.
The resultant product shall be rounded to the nearest $100.00 increment.
For a taxpayer whose total household resources are $75,000.00 or more for
a single return or $150,000.00 or more for a joint return, the personal
exemption allowed under subsection (2) shall be adjusted by multiplying
the exemption for the tax year for a single return by a fraction, the
numerator of which is $100,000.00 minus the taxpayer’s total household
resources, and the denominator of which is $25,000.00, and for a joint
return by a fraction, the numerator of which is $200,000.00 minus the
47
taxpayer's total household resources, and the denominator of which is
$50,000.00. The personal exemption allowed under subsection (2) shall not
be allowed for a single taxpayer whose total household resources exceed
$100,000.00 or for joint filers whose total household resources exceed
$200,000.00.
* * *
(9) In determining taxable income under this section, the following
limitations and restrictions apply:
(a) For a person born before 1946, this subsection provides no
additional restrictions or limitations under subsection (1)(f).
(b) For a person born in 1946 through 1952, the sum of the
deductions under subsection (1)(f)(i), (ii), and (iv) is limited to $20,000.00
for a single return and $40,000.00 for a joint return. After that person
reaches the age of 67, the deductions under subsection (1)(f)(i), (ii), and (iv)
do not apply and that person is eligible for a deduction of $20,000.00 for a
single return and $40,000.00 for a joint return, which deduction is available
against all types of income and is not restricted to income from retirement
or pension benefits. However if that person’s total household resources
exceed $75,000.00 for a single return or $150,000.00 for a joint return, that
person is not eligible for a deduction of $20,000.00 for a single return and
$40,000.00 for a joint return. A person that takes the deduction under
subsection (1)(e) is not eligible for the unrestricted deduction of $20,000.00
for a single return and $40,000.00 for a joint return under this subdivision.
(c) For a person born after 1952, the deduction under subsection
(1)(f)(i), (ii), or (iv) does not apply. When that person reaches the age of
67, that person is eligible for a deduction of $20,000.00 for a single return
and $40,000.00 for a joint return, which deduction is available against all
types of income and is not restricted to income from retirement or pension
benefits. If a person takes the deduction of $20,000.00 for a single return
and $40,000.00 for a joint return, that person shall not take the deduction
under subsection (1)(f)(iii) and shall not take the personal exemption under
subsection (2). That person may elect not to take the deduction of
$20,000.00 for a single return and $40,000.00 for a joint return and elect to
take the deduction under subsection (1)(f)(iii) and the personal exemption
under subsection (2) if that election would reduce that person’s tax liability.
However, if that person’s total household resources exceed $75,000.00 for
a single return or $150,000.00 for a joint return, that person is not eligible
for a deduction of $20,000.00 for a single return and $40,000.00 for a joint
return. A person that takes the deduction under subsection (1)(e) is not
48
eligible for the unrestricted deduction of $20,000.00 for a single return and
$40,000.00 for a joint return under this subdivision.
(d) For a joint return, the limitations and restrictions in this
subsection shall be applied based on the age of the older spouse filing the
joint return.
If the Legislature disagrees with this Court’s determination that what remains in 2011 PA
38 after severance is “operable” pursuant to MCL 8.5, or believes that this determination
is otherwise inconsistent with its intent, the Legislature is, of course, free to modify MCL
206.30 as it sees fit, subject only to the constraints of the state and federal constitutions.56
56
Although Justice HATHAWAY agrees that those portions of the statutes that we sever
must be struck down because they are unconstitutional, she nevertheless accuses us of
“redraft[ing] a section of this act to provide tax deductions and exemptions that the
Legislature clearly did not intend.” Post at 1. Obviously, the Legislature intended to
include these sections, else this Court would not now be confronted with the question of
their constitutionality. However, whenever the Legislature enacts legislation that this
Court deems unconstitutional, it is our responsibility to rectify that unconstitutionality,
notwithstanding the Legislature’s intent. The next question for any Court confronted
with such a situation is to determine whether the unconstitutional language can be
severed from the rest of the act without undermining the act, and in this regard, the
Legislature’s intent is controlling. And for the reasons discussed earlier, we believe that
striking down only those portions of the act that are unconstitutional, rather than striking
down entire sections, is more consistent with the Legislature’s intentions. Contrary to
Justice HATHAWAY’s contention, we are in no way “assert[ing] that members of the
Legislature would have known which words from each section it passed could be held
unconstitutional.” Post at 15-16. Obviously, we must, and do, assume that when the
Legislature passed this act, it believed that the entire act was constitutional, or it would
not have enacted it. However, because we reach a different conclusion, we must
remediate what is unconstitutional. And by enacting MCL 8.5, the Legislature has
informed us that when we sever unconstitutional language, this Court should leave intact
all other language, as long as that language is “operable” and not “inconsistent with the
manifest intent of the legislature.” In light of our analysis of the purposes of the act, and
the statements at oral argument of the lawyer representing the position of the Legislature
and the Governor, we believe that we have reached the correct severance determination
under MCL 8.5. If the intent of the Legislature is more truly in accord with the analysis
of Justice HATHAWAY’s opinion than with that of this opinion, the Legislature is, of
course, free to act on its own to conform with that intent.
Further, in asserting as Justice HATHAWAY does that this Court should strike down
the deduction and exemption sections in their entirety, we conclude that, just as the
Legislature did not “intend” that this Court strike down the limited portions of the law
49
IV. CONCLUSION
For all of these reasons, we hold that:
Reducing or eliminating the statutory exemption for public-pension incomes as set
forth in MCL 206.30 does not impair accrued financial benefits of a “pension plan
[or] retirement system of the state [or] its political subdivisions” under Const
1963, art 9, § 24; and
Reducing or eliminating the statutory tax exemption for pension incomes as set
forth in MCL 206.30 does not impair a contractual obligation in violation of Const
1963, art 1, § 10 or US Const, art I, § 10(1).
And we unanimously hold that:
Determining eligibility for income-tax exemptions on the basis of date of birth as
set forth in MCL 206.30(9) does not violate the equal protection of the law under
Const 1963, art 1, § 2 or the Fourteenth Amendment of the United States
Constitution; and
Determining eligibility for income-tax exemptions and deductions on the basis of
total household resources as set forth in MCL 206.30(7) and (9) does create a
graduated income tax in violation of Const 1963, art 9, § 7.
that the Court determines to be unconstitutional, the Legislature also did not “intend” that
the entirety of these sections be struck down. Moreover, if we were to strike down these
entire sections, and return the law to its status before 2011 PA 38 was passed, deductions
and exemptions would still apply to those taxpayers earning $75,000 or more, just as they
did before the enactment of the law. Thus, at least in this respect, Justice HATHAWAY’s
proposed remedy is no different from ours: both would allow taxpayers earning $75,000
or more to receive these deductions and exemptions.
50
Finally, we hold that:
Pursuant to MCL 8.5, the unconstitutional portions of 2011 PA 38 can reasonably
be severed from the remainder of the act, which is constitutional with respect to all
the issues raised.
Although Justice HATHAWAY agrees that those portions of the statutes that we
sever ought to be struck down because they are unconstitutional, she nevertheless asserts
that we are “judicially creating tax deductions and exemptions for individuals earning
more than $75,000 annually . . . .” Post at 2. This is an odd assertion, given that she too
would “create tax deductions and exemptions for individuals earning more than $75,000”
by striking down the amendments of these provisions in their entirety and thereby
returning the law to its pre-2011 PA 38 status, in which taxpayers earning more than
$75,000 received these same deductions and exemptions.
We reemphasize that the questions before us are all constitutional questions. This
Court is not deciding whether 2011 PA 38 represents wise or unwise, prudent or
imprudent, public policy, only whether 2011 PA 38 is consistent with the constitutions of
the United States and Michigan.
Stephen J. Markman
Robert P. Young, Jr.
Mary Beth Kelly
Brian K. Zahra
51
STATE OF MICHIGAN
SUPREME COURT
In re REQUEST FOR ADVISORY
OPINION REGARDING
CONSTITUTIONALITY OF 2011 PA 38
No. 143157
CAVANAGH, J. (concurring in part and dissenting in part).
I concur in result only with part III(C) of the majority opinion because I do not
believe 2011 PA 38 offends either the state or federal guarantees of equal protection
under the law. Additionally, I concur in result only with part III(D) of the majority
opinion because I agree that 2011 PA 38 violates the prohibition against a graduated
income tax under Const 1963, art 9, § 7. However, I respectfully dissent from part III(A)
of the majority opinion because, in my view, 2011 PA 38 violates Const 1963, art 9, § 24
as to those pension benefits that will have accrued before January 1, 2012, when 2011 PA
38 goes into effect. I would hold that the right to the statutory tax exemptions provided
by the former MCL 206.30(1)(f) and similar statutes is an accrued financial benefit that
attaches to the pension benefits at the time they accrue and that the right to the deferred
exemption is therefore a contractual obligation that may not be diminished or impaired.
See Const 1963, art 9, § 24. As applied to any pension benefits that accrue after
January 1, 2012, however, I do not believe that 2011 PA 38 would violate Const 1963, art
9, § 24.
I. ACCRUED FINANCIAL BENEFITS
The first sentence of Const 1963, art 9, § 24 provides that “[t]he accrued financial
benefits of each pension plan and retirement system of the state and its political
subdivisions shall be a contractual obligation thereof which shall not be diminished or
impaired thereby.” Therefore, the critical question is whether the tax exemption
contained in the preamendment version of MCL 206.30(1)(f) constitutes an accrued
financial benefit of a public pension plan or retirement system. If the answer is
affirmative, then the tax exemption is a contractual obligation that may not be diminished
or impaired.
I believe that the ratifiers of the 1963 Constitution intended the term “accrued
financial benefit[]” to encompass statutory tax exemptions for public pensions. Rather
than choosing a precisely limited term—such as “monetary payment” or “cash
distribution”—the framers chose to include in article 9, § 24 the broader, generalized
term “financial benefits.” In Musselman v Governor, 448 Mich 503, 514; 533 NW2d 237
(1995), this Court explained that a general rule is broader than “a set of specific
commands” and that a general rule “governs possibilities that could not have been
anticipated at the time.” Given that a general rule is intended to encompass possibilities
that may not yet exist, the term “accrued financial benefits” is certainly broad enough to
encompass statutory tax exemptions, some of which already existed when the 1963
Constitution was ratified.1
1
Because the framers chose a broad, generalized term, I find irrelevant the majority
opinion’s assertion that there is some import to the constitutional silence regarding
whether pension benefits can be taxed. Simply put, the term “financial benefit” is
2
Indeed, Michigan has a long history of exempting public pensions from taxation.
Annuity payments to employees in city library employees’ retirement systems have been
exempt from all state, county, township, city, village, and school district taxes since the
1920s, and state employee pensions have been similarly exempt since 1943 under the
State Employees’ Retirement Act (SERA). See MCL 38.705; MCL 38.40. Because
these public-pension exemptions were firmly in place long before the 1963 Constitution
was ratified, the financial benefits they provided to covered employees would certainly
have been known to the framers and the ratifiers. In 1969, the Legislature enacted 1969
PA 332, which amended § 30 of the Income Tax Act, MCL 206.30, and extended the
state’s longstanding tax exemptions to the benefits received from all public pension and
retirement systems. See MCL 206.30(1)(f), as amended by 2009 PA 134.2 Extending the
tax exemption to all public employees provided an incentive that would attract much-
needed professionals to critical jobs in public employment and partially compensated
retirees for the comparatively lower compensation received during their years of service
intentionally broad enough to encompass far more than the monetary payments due to
retirees at the time of distribution.
2
Before the enactment of 2011 PA 38, MCL 206.30(1)(f) provided that the following
were to be deducted from the adjusted gross income when computing state income taxes:
(i) Retirement or pension benefits received from a federal public
retirement system or from a public retirement system of or created by this
state or a political subdivision of this state.
(ii) Retirement or pension benefits received from a public retirement
system of or created by another state or any of its political subdivisions if
the income tax laws of the other state permit a similar deduction or
exemption or a reciprocal deduction or exemption of a retirement or
pension benefit received from a public retirement system of or created by
this state or any of the political subdivisions of this state.
3
to the state. With this history in mind, I believe that the statutory tax exemptions for
public pensions are well within the types of benefits to which the ratifiers intended to
extend contractual protections.
Concluding that the right to the tax exemption at distribution is both a “financial
benefit” and an “accrued benefit” is consistent with this historical background.
Specifically, there is no dispute that the various tax exemptions for public pensions
provide a financial benefit because they result in a greater net monetary payment to
retirees. There is likewise no dispute that taxing pension benefits diminishes those
payments because removing the exemption will result in a reduced net monetary payment
to retirees.
Turning to the phrase “accrued benefit,” the majority relies in large part on the
definition in Studier v Mich Pub Sch Employees’ Retirement Bd, 472 Mich 642; 698
NW2d 350 (2005), to hold that “[a] pension-tax exemption is not an ‘accrued’ benefit
because it does not ‘grow over time.’” Ante at 16, quoting Studier, 472 Mich at 654. In
holding that health-care benefits were not accrued financial benefits, the Studier majority
concluded that the “ratifiers of our Constitution would have commonly understood
‘accrued’ benefits to be benefits of the type that increase or grow over time—such as a
pension payment or retirement allowance that increases in amount along with the number
of years of service a public school employee has completed.” Studier, 472 Mich at 654.
Although I do not take issue with the majority’s recitation of the various
dictionary definitions of “accrue,” I do not see how these definitions mandate that the
benefit must “increase or grow over time.” Id. Indeed, not all the definitions the
majority provides encompass the idea of accumulation over time. For example, the
4
quoted definitions of “accrue” include “to come into existence as an enforceable claim,”
“to vest as a right,” and “to become a present and enforceable right or demand.” Ante at
15 (citations and quotation marks omitted). None of these definitions requires
accumulation over time. Instead, these definitions acknowledge that a right can accrue
immediately.3
As I stated in my Studier dissent, “[t]he term ‘accrued financial benefits’ was
meant to include benefits that an employee had worked in reliance on and continued to
work in reliance on.” Studier, 472 Mich at 676 (CAVANAGH, J., dissenting). Like the
health-care benefits at issue in Studier, I believe that our public employees have “worked
in reliance on and continued to work in reliance on” Michigan’s contractual promise that
their pension benefits—once accrued—would not be taxed by the state at the time of
distribution. Given Michigan’s longstanding exemptions for state employees and city
librarians, I believe that this interpretation is well within the common understanding of
the people at the time of ratification. See Goldstone v Bloomfield Twp Pub Library, 479
Mich 554, 570-571; 737 NW2d 476 (2007) (CAVANAGH, J., dissenting).
Regardless, I believe that the tax exemption for public pensions fits even the
Studier majority’s narrow interpretation of “accrued benefit,” because the financial
3
For example, if one deposits $100 into a bank account, the right to withdraw the $100
“accrues” or “vest[s] as a right” immediately, regardless of whether additional money is
deposited into the account. The customer has an immediate, enforceable claim to
withdraw the money. The only conditions imposed are those contained in the contract
between the bank and the customer. Thus, if one deposits $100 into an account under the
contractual promise that if the customer waits 10 years, the customer will be entitled to
withdraw $150—free of any additional costs or fees—then the right to withdraw that
amount in 10 years vests at the point of the original deposit.
5
benefit provided by what is essentially a deferred tax exemption does “increase or grow
over time.” Specifically, the increase in the value of the tax exemption correlates
precisely to the increase in the value of the employee’s retirement account. As the value
of an employee’s retirement account grows over time, so too does the amount of money
that will be exempt from taxation upon distribution, resulting in a financial benefit that
increases with one’s length of service to the public employer. Thus, I believe that the tax
exemptions at issue here fit even the Studier majority’s narrow definition.
In my view, the financial benefits of a pension plan—including any right to a tax
exemption at distribution—accrue as an employee performs work for the public
employer. See comments of Delegate Richard Van Dusen, 1 Official Record,
Constitutional Convention 1961, p 771) (“And with respect to work performed, it is the
opinion of the committee that the public employee should have a contractual right to
benefits of the pension plan, which should not be diminished by the employing unit after
the service has been performed.”); Advisory Opinion re Constitutionality of 1972 PA 258,
389 Mich 659, 663; 209 NW2d 200 (1973) (holding that “the Legislature cannot diminish
or impair accrued financial benefits, but we think it may properly attach new conditions
for earning financial benefits which have not yet accrued”). And because prior to
January 1, 2012, the financial benefits of public pension plans accrued under a statutory
framework that exempted those benefits from taxation at distribution, I believe that the
right to the tax exemption attaches to the benefits themselves—as they are earned—and
accrues simultaneously.
Thus, while I agree that one generally cannot have any vested right in the
continuation of any tax law, Detroit v Walker, 445 Mich 682, 703; 520 NW2d 135
6
(1994), this is not true if the Constitution provides otherwise, see Shivel v Kent Co
Treasurer, 295 Mich 10, 15; 294 NW 78 (1940). I believe that article 9, § 24 provides
otherwise. As I have explained, the Legislature is free to amend the tax exemptions, and
indeed has seen fit to do so with 2011 PA 38 and similar acts. Accordingly, because
article 9, § 24 protects the pension benefits that have already accrued from diminishment
or impairment, and because I believe that the right to the tax exemption at distribution is
essentially a deferred tax exemption that accrues simultaneously with the benefits
themselves, I do not believe it is constitutional for the state to tax any pension benefits
that will have accrued before January 1, 2012.
In contrast to the majority, I do not perceive any conflict with Const 1963, art 9,
§ 2, which provides that “[t]he power of taxation shall never be surrendered, suspended
or contracted away.” (Emphasis added.) The key phrase in article 9, § 2 is “power of
taxation,” which is a far different concept from actual taxation. In W A Foote Mem Hosp,
Inc v City of Jackson Hosp Auth, 390 Mich 193; 211 NW2d 649 (1973), this Court
concluded that article 9, § 2 was not violated when the Legislature chose to grant a tax
exemption. Id. at 214-215. This Court held that rather than surrendering its power of
taxation by granting the exemption, the Legislature was affirmatively exercising its
taxation power and discretion. Id. at 215. Likewise, in enacting MCL 206.30(1)(f), the
Legislature again exercised its discretion by creating a tax exemption, but did not forever
surrender its power to tax. The import of article 9, § 2, of course, is that the Legislature
can repeal or amend the tax exemption created by MCL 206.30(1)(f), as it has chosen to
do in 2011 PA 38. And while the Legislature may properly tax any pension benefits that
7
accrue after January 1, 2012, when 2011 PA 38 goes into effect, in my view, article 9,
§ 24 protects from taxation any pension benefits that will have already accrued.
I also find it unavailing for the majority to argue that the second sentence of article
9, § 24 supports the majority’s conclusion that § 24 was never meant to include a tax
exemption because a tax exemption cannot be funded yearly. As the convention
comments indicate, the second sentence of § 24 was intended to ensure the annual
funding of pension liabilities. See 2 Constitutional Convention 1961, Official Record,
p 2659. A tax exemption is not a liability. A tax exemption does not represent money
the state must pay out; it only limits what the state may take in. Offering a tax exemption
as a financial benefit for its employees allows the state to attract and retain talented and
dedicated employees without incurring any yearly funding obligation for the benefit
given. Therefore, the second sentence of § 24 is irrelevant to whether a tax exemption is
encompassed within the meaning of “accrued financial benefits.”4
In addition, it is well established that “an advisory opinion does not constitute a
decision of the Court and is not precedentially binding in the same sense as a decision of
the Court after a hearing on the merits.” Advisory Opinion re Constitutionality of 1972
PA 294, 389 Mich 441, 461 n 1; 208 NW2d 469 (1973). With this premise in mind, I
4
The majority opinion’s claim that my analysis proves inconsistent is premised on the
majority’s tautological assumption that only those benefits that are capable of being
funded annually qualify as accrued financial benefits under article 9, § 24. The
correctness of the majority’s accusation of inconsistency rests on its conclusion that the
second sentence of article 9, § 24 is indispensible to the definition of “accrued financial
benefits.” The majority obfuscates my point, however, which is that the second sentence
of article 9, § 24 is irrelevant to tax exemptions because, while a tax exemption is an
accrued financial benefit, it is not a liability that can be funded annually.
8
believe the majority opinion sweeps far too wide in attempting to foreclose the myriad
possible challenges premised on individual factual circumstances. For example, how
does the removal of the tax exemption affect collective-bargaining agreements, in which
the rate of future pension benefits was calculated, at least in part, in reliance on
Michigan’s longstanding exemption for pension benefits? As Justice LEVIN cautioned in
a previous advisory opinion, “[w]hen a court holds an act to be constitutional it does no
more than deny a particular claim of unconstitutionality. It ought not, by premature
expressions on generalized abstract claims, to appear to foreclose persons differently
situated from advancing more concrete claims of unconstitutionality.” Id. at 484 (LEVIN,
J., concurring). Footnote 9 of the majority opinion does just that: it attempts to foreclose
differently situated persons from advancing concrete claims, and it does so with
“premature expressions on generalized abstract claims.”
Likewise, I believe the majority opinion reaches too far by attempting to foreclose
future challenges to the Legislature’s revocations of the individual exemptions contained
in SERA, MCL 38.40(1); the Public School Employees Retirement Act, MCL
38.1346(1); the Michigan Legislative Retirement System Act, MCL 38.1057(1); the city
library employees’ retirement system act, MCL 38.705; and the Judges Retirement Act,
MCL 38.2670(1).5 In my view, the existence of these specific tax exemptions for public
5
All these provisions have been amended to remove the exemptions, beginning
January 1, 2012. See Public Acts 41 through 45 of 2011. Notably, the Governor did not
request that this Court review the constitutionality of these other statutory amendments.
Nevertheless, my view that the statutory tax exemption within the Income Tax Act
creates accrued financial benefits for purposes of article 9, § 24 applies equally to the tax
exemptions found within these retirement acts.
9
employees within the individual retirement acts themselves creates a strong argument
that, under article 9, § 24, the exemptions are part of “each pension plan [or] retirement
system,” independent of the Income Tax Act.6
I think it important to emphasize that until the current fiscal crisis, the state of
Michigan was perfectly content to receive the reciprocal benefits of the promise made to
its prospective and current employees that, should they continue in service to the state
6
For example, before the amendments contained in 2011 PA 41, § 40 of SERA provided
in relevant part:
The right of a person to a pension, an annuity, a retirement
allowance, any optional benefit, any other right accrued or accruing to any
person under the provisions of this act, the various funds created by this
act, and all money and investments and income of the funds, are exempt
from any state, county, municipal, or other local tax. [MCL 38.40(1), as
amended by 2002 PA 99 (emphasis added).]
In my view, there is a strong argument that the tax exemption provided by SERA is an
inherent part of the deferred compensation embodied in pension plan. Nevertheless,
given my belief that the tax exemptions are “contractual obligations” under Const 1963,
art 9, § 24, it is not necessary to opine on whether the tax exemption statutes found within
the individual retirement acts—such as the tax exemption previously found within
SERA—create contractual obligations for purposes of the Contracts Clause, as have other
jurisdictions. See, e.g., Hughes v Oregon, 314 Or 1, 21 n 27; 838 P2d 1018 (1992).
Further, because I conclude that 2011 PA 38 violates article 9, § 24 of the Constitution, I
do not find it necessary to conclusively opine on whether the statutory amendments also
violate the Contracts Clauses of the Michigan and United States Constitutions.
Nevertheless, it briefly bears mentioning that there is an arguable Contracts Clause
violation in this case. Because I believe that the statutory tax exemptions are accrued
financial benefits under article 9, § 24, these benefits are “contractual obligations” that
implicate the Contracts Clauses. Accordingly, under the framework for Contracts Clause
analyses set forth in Romein v Gen Motors Corp, 436 Mich 515, 534-536; 462 NW2d 555
(1990), it is arguable that the modifications of the tax exemption statutes will amount to a
substantial impairment of that contractual right. See Bailey v North Carolina, 348 NC
130, 151; 500 SE2d 54 (1998). Finally, even if there is a legitimate purpose behind the
statutory amendments, I question whether violating article 9, § 24 of the Constitution is a
reasonable means of carrying out that purpose.
10
long enough to be eligible for retirement, they would be rewarded with a tax exemption
for the retirement benefits they had earned. Only now do our state employees and
retirees learn that their reliance on Michigan’s promise was unfounded, and today’s
majority decision affixes a judicial stamp of approval to the revocation of that promise.
Between MCL 206.30(1)(f) and article 9, § 24, the state of Michigan entered into a
contract with its employees, promising that in return for their years of service, their
pensions would not be taxed. Promises must be kept.
I, therefore, respectfully dissent from the majority’s decision because I believe that
Const 1963, art 9, § 24, requires the state to keep its promise. I would hold that 2011 PA
38 is unconstitutional as applied to any pension benefits that will have accrued before
January 1, 2012.
II. CONCLUSION
I respectfully dissent from the majority’s conclusion that 2011 PA 38 does not
violate Const 1963, art 9, § 24. In my view, removing the tax exemptions formerly
provided by MCL 206.30(1)(f) and similar statutes violates article 9, § 24, but only as
applied to any public-pension benefits that will have accrued before January 1, 2012,
when the new law goes into effect. As to pension benefits that accrue after January 1,
2012, taxation of those benefits must be limited as stated in part III(D) of the majority
opinion, because I agree with the majority that 2011 PA 38 violates the prohibition
against a graduated income tax under Const 1963, art 9, § 7.
Michael F. Cavanagh
Marilyn Kelly
11
STATE OF MICHIGAN
SUPREME COURT
In re REQUEST FOR ADVISORY
OPINION REGARDING
CONSTITUTIONALITY OF 2011 PA 38 No. 143157
HATHAWAY, J. (dissenting).
I dissent from the majority’s decision in this matter because the majority allows
unconstitutional limitations on retirement-based income-tax deductions to remain in place
and engages in policymaking decisions that should properly be left to the Legislature and
the Governor. The majority not only fails to strike down provisions of 2011 PA 381 that
are clearly unconstitutional, but also redrafts a section of this act to provide tax
deductions and exemptions that the Legislature clearly did not intend. I would hold that
the restrictions on the deductions of retirement income, as well as the income-based
restrictions on personal exemptions, enacted by 2011 PA 38 are unconstitutional. The
restrictions on deductions of retirement benefits contained in § 30(9) of the Income Tax
Act, MCL 206.30(9), as amended by 2011 PA 38, clearly violate article 9, § 24; article 1,
§ 10; and article 9, § 7 of Michigan’s Constitution. The income-based restrictions on
personal exemptions contained in § 30(7) of that act, as amended by 2011 PA 38, clearly
violate article 9, § 7 of the Michigan Constitution. Moreover, I would follow the
1
Section 30(9) of the Income Tax Act, as amended by 2011 PA 38, is focused on
“deductions” against retirees’ income. Section 30(7) is focused on “exemptions” with
regard to the income of all taxpayers who qualify for the personal exemption under
§ 30(2).
established rules of statutory construction and refrain from judicially creating tax
deductions and exemptions for individuals earning more than $75,000 annually and
couples earning more than $150,000 annually, which the Legislature clearly did not
intend.2 I would leave to the Legislature the important role of deciding the best tax
policy for the citizens of this state and limit the judiciary to its proper role of reviewing
statutes to determine whether they are in accordance with our Constitution. Because the
majority usurps this important legislative function in its decision today, I dissent.
I. ANALYSIS
On May 25, 2011, the Governor of Michigan signed 2011 PA 38 into law. Among
the various changes to the tax code enacted in 2011 PA 38 is a sliding scale for
limitations on deductions of retirement income based on age and income level. The act
also imposes a sliding scale for limitations on income exemptions based on income level.
Opponents of the act argue that these changes violate the United States and Michigan
Constitutions, while supporters of the act contend that its provisions are consistent with
the Legislature’s power to tax.
2
It is clear from the language of 2011 PA 38 that the Legislature did not intend to extend
deductions or exemptions to individuals and couples with higher incomes. The
Legislature specifically did not extend the deductions at issue to individuals earning more
than $75,000 and couples earning more than $150,000 annually. The Legislature
similarly limited personal exemptions for individuals earning between $75,000 and
$100,000 and for couples earning between $150,000 and $200,000. Further, the
Legislature specifically prohibited individuals earning more than $100,000 and couples
earning more than $200,000 from claiming any personal exemptions. Despite this
legislative intent, the majority provides such deductions and exemptions.
2
On May 31, 2011, the Governor asked this Court to render an advisory opinion on
issues pertaining to whether certain provisions of 2011 PA 38 are constitutional.3 The
specific inquiries raised by the Governor were (1) whether reducing or eliminating the
statutory exemption for public-pension incomes as described in MCL 206.30, as
amended, impairs accrued financial benefits of a “pension plan [or] retirement system of
the state [or] its political subdivisions” under Const 1963, art 9, § 24; (2) whether
reducing or eliminating the statutory tax exemption for pension incomes as described in
MCL 206.30, as amended, impairs a contractual obligation in violation of Const 1963, art
1, § 10 or US Const, art I, § 10(1); (3) whether determining eligibility for income-tax
exemptions on the basis of total household resources, or age and total household
resources as described in MCL 206.30(7) and (9), as amended, creates a graduated
income tax in violation of Const 1963, art 9, § 7; and (4) whether determining eligibility
for income-tax exemptions on the basis of date of birth as described in MCL 206.30(9),
as amended, violates equal protection of the law under Const 1963, art 1, § 2 or the
Fourteenth Amendment of the United States Constitution.4
3
At the time the Governor asked this Court for an advisory opinion, 2011 PA 38 was still
referred to by its public act number. It went into effect on October 1, 2011, and the
provisions of 2011 PA 38 are now referred to by their statutory numbers, e.g., MCL
206.30. Accordingly, I will refer to the provisions at issue by their statutory numbers in
the remainder of this opinion. Unless otherwise noted, all references to those statutes are
to the amended versions.
4
As to the fourth question posed by the Governor, I am not persuaded that the provision
of the act basing tax liability on age violates equal-protection guarantees. However,
because I conclude that the provision is unconstitutional for other reasons, I will not
address the equal-protection issue in detail in this opinion.
3
This Court agreed to hear oral argument on the Governor’s questions and
requested that the Attorney General provide briefing in support of and in opposition to
the constitutionality of the statutory sections at issue. In re Request for Advisory Opinion
Regarding Constitutionality of 2011 PA 38, 489 Mich 954 (2011).
A. MCL 206.30(9) VIOLATES ARTICLE 9, § 24 OF THE MICHIGAN
CONSTITUTION
The first issue is whether reducing or eliminating the statutory deduction for
public-pension income as described in MCL 206.30 impairs accrued financial benefits of
a “pension plan [or] retirement system of the state [or] its political subdivisions” under
Const 1963, art 9, § 24. I conclude that it clearly does.
The starting point for this analysis is the language of article 9, § 24, which protects
accrued retirement benefits of public employees.5 Const 1963, art 9, § 24 provides, in
part: “The accrued financial benefits of each pension plan and retirement system of the
state and its political subdivisions shall be a contractual obligation thereof which shall not
be diminished or impaired thereby.” Pursuant to this constitutional provision, accrued
financial benefits of public-pension and retirement systems shall not be diminished or
impaired. This constitutional provision was ratified by the citizens of the state of
Michigan and represents the will of the voters. Article 9, § 24 is not discretionary; it is a
mandatory provision of our state Constitution that the Legislature is bound to follow.
Moreover, the judiciary is bound to abide by this provision in determining whether a
legislative enactment withstands constitutional scrutiny.
5
See Tyler v Livonia Pub Sch, 459 Mich 382, 396; 590 NW2d 560 (1999).
4
Before the enactment of the current version of MCL 206.30,6 the prior version of
MCL 206.30(1)(f)(i)7 unequivocally provided that public pensions are not subject to state
6
The current version of MCL 206.30(1)(f) provides in pertinent part:
Deduct the following to the extent included in adjusted gross income
subject to the limitations and restrictions set forth in [MCL 206.30(9)]:
(i) Retirement or pension benefits received from a federal public
retirement system or from a public retirement system of or created by this
state or a political subdivision of this state.
(ii) Retirement or pension benefits received from a public retirement
system of or created by another state or any of its political subdivisions if
the income tax laws of the other state permit a similar deduction or
exemption or a reciprocal deduction or exemption of a retirement or
pension benefit received from a public retirement system of or created by
this state or any of the political subdivisions of this state.
* * *
(iv) Beginning on and after January 1, 2007, retirement or pension
benefits not deductible under [MCL 206.30(1)(f)(i)] or [MCL 206.30(1)(e)]
from any other retirement or pension system or benefits from a retirement
annuity policy in which payments are made for life to a senior citizen, to a
maximum of $42,240.00 for a single return and $84,480.00 for a joint
return. The maximum amounts allowed under this subparagraph shall be
reduced by the amount of the deduction for retirement or pension benefits
claimed under [MCL 206.30(1)(f)(i)] or [MCL 206.30(1)(e)] and by the
amount of a deduction claimed under subdivision [MCL 206.30(1)(p)]. For
the 2008 tax year and each tax year after 2008, the maximum amounts
allowed under this subparagraph shall be adjusted by the percentage
increase in the United States consumer price index for the immediately
preceding calendar year. The department shall annualize the amounts
provided in this subparagraph as necessary. As used in this subparagraph,
“senior citizen” means that term as defined in [MCL 206.514].
7
The previous version of MCL 206.30(1)(f)(i), as amended by 2009 PA 134, set forth
unrestricted deductions for “[r]etirement or pension benefits received from a federal
public retirement system or from a public retirement system of or created by this state or
a political subdivision of this state.”
5
income tax. At issue is whether MCL 206.30(9), which now abrogates the protection of
public-pension benefits for individuals born in or after 19468 and imposes a tax on
payments of public-pension benefits, is consistent with the Constitution. Subsection (9)
provides:
In determining taxable income under this section, the following
limitations and restrictions apply:
(a) For a person born before 1946, this subsection provides no
additional restrictions or limitations under [MCL 206.30(1)(f)].
(b) For a person born in 1946 through 1952, the sum of the
deductions under [MCL 206.30(1)(f)(i), (ii), and (iv)] is limited to
$20,000.00 for a single return and $40,000.00 for a joint return. After that
person reaches the age of 67, the deductions under [MCL 206.30(1)(f)(i),
(ii), and (iv)] do not apply and that person is eligible for a deduction of
$20,000.00 for a single return and $40,000.00 for a joint return, which
deduction is available against all types of income and is not restricted to
income from retirement or pension benefits. However if that person’s total
household resources exceed $75,000.00 for a single return or $150,000.00
for a joint return, that person is not eligible for a deduction of $20,000.00
for a single return and $40,000.00 for a joint return. A person that takes the
deduction under [MCL 206.30(1)(e)] is not eligible for the unrestricted
deduction of $20,000.00 for a single return and $40,000.00 for a joint return
under this subdivision.
(c) For a person born after 1952, the deduction under [MCL
206.30(1)(f)(i), (ii), or (iv)] does not apply. When that person reaches the
age of 67, that person is eligible for a deduction of $20,000.00 for a single
return and $40,000.00 for a joint return, which deduction is available
against all types of income and is not restricted to income from retirement
or pension benefits. If a person takes the deduction of $20,000.00 for a
single return and $40,000.00 for a joint return, that person shall not take the
8
While this first issue discusses public pensions only, MCL 206.30(9) does not
distinguish between private and public pensions. Because I would hold that subsection
(9) is unconstitutional, I would conclude that the restrictions contained therein are not
applicable to any retiree.
6
deduction under [MCL 206.30(1)(f)(iii)] and shall not take the personal
exemption under [MCL 206.30(2)]. That person may elect not to take the
deduction of $20,000.00 for a single return and $40,000.00 for a joint return
and elect to take the deduction under [MCL 206.30(1)(f)(iii)] and the
personal exemption under [MCL 206.30(2)] if that election would reduce
that person’s tax liability. However, if that person’s total household
resources exceed $75,000.00 for a single return or $150,000.00 for a joint
return, that person is not eligible for a deduction of $20,000.00 for a single
return and $40,000.00 for a joint return. A person that takes the deduction
under [MCL 206.30(1)(e)] is not eligible for the unrestricted deduction of
$20,000.00 for a single return and $40,000.00 for a joint return under this
subdivision.
(d) For a joint return, the limitations and restrictions in this
subsection shall be applied based on the age of the older spouse filing the
joint return. [MCL 206.30(9).]
In reviewing this statute, we must examine the language of the statute itself, and
the effect or impact of this new tax on the benefits received by public employees born in
or after 1946, to determine whether “accrued financial benefits” are “impaired or
diminished.” This statute, without question, imposes a new tax on public-employee
pensions that did not previously exist. It does so by restricting and limiting the pension
and retirement deductions set forth in MCL 206.30(1)(f) on the basis of age and income
level. These restrictions and limitations create various degrees of tax liability.
It is undisputed that public-employee pensions and retirement plans are an
“accrued financial benefit” for purposes of article 9, § 24. As stated in Studier v Mich
Pub Sch Employees’ Retirement Bd, 472 Mich 642, 654; 698 NW2d 350 (2005), “the
ratifiers of our Constitution would have commonly understood ‛accrued’ benefits to be
benefits of the type that increase or grow over time—such as a pension payment or
retirement allowance that increases in amount along with the number of years of service
[an] employee has completed.” Accordingly, MCL 206.30(9) clearly implicates an
7
accrued financial benefit. The inquiry then becomes whether that accrued financial
benefit is diminished or impaired by the imposition of a state tax directly on that pension.
In analyzing this issue, the effect or impact the provision will have on public
pensions cannot be ignored. MCL 206.30(9) has no impact on public pensions for those
persons born before 1946. However, all persons entitled to receive public pensions born
in or after 1946 will be directly impacted. These public employees with vested pensions
will have their benefits reduced. This is a direct financial impact. For example, before
the enactment of MCL 206.30(9), a retiree born after 1952 who earned annual public-
pension benefits of $20,000 would receive the full $20,000 annually. Under MCL
206.30(9), however, that retiree’s $20,000 pension is no longer deductible. That $20,000
is subject to the state’s 4.35 percent income tax rate, which results in an $875 reduction in
the total amount of money that the retiree will receive annually. This is a direct tax on a
public pension that will in most instances be deducted directly from the pension benefit at
the time of distribution. This results in a financial reduction in the benefit to the pension
recipient. A financial reduction of a benefit is a diminishment or impairment under any
definition.9 Thus, a direct tax on public pensions contravenes the constitutional
prohibition contained in article 9, § 24. Specifically, by diminishing the vested pension
9
“Diminish” is defined as “to make, or make seem, smaller; reduce in size, degree,
importance, etc.; lessen,” Webster’s New World College Dictionary (1988), or “to lessen;
decrease,” Random House Webster’s College Dictionary (1997). “Impair” is defined as
“to make worse, less, weaker, etc.; damage; reduce.” Webster’s New World College
Dictionary (1988).
8
and retirement benefits of public employees, MCL 206.30(9) violates the constitutional
mandate that such benefits “shall not be diminished.”10
The majority opines that MCL 206.30(9) only reduces or eliminates tax deductions
based on retirement and pension benefits and does not directly reduce the benefits
themselves. The majority reasons that “tax deductions” do not amount to an accrued
financial benefit and, therefore, the deductions do not fall within the purview of article 9,
§ 24. I find the majority’s reasoning unpersuasive and erroneous because it creates an
unnecessary distinction. Simply stated, a tax is a tax, whether it comes in the form of a
direct tax increase or the elimination of a deduction. The elimination of this tax
deduction results in a new tax, which is directly imposed on vested pensions. The
pension benefits are irrefutably “accrued financial benefits.” The majority disregards
this. The majority also disregards the fact that the payout of pension benefits is reduced.
But the impact remains the same: pension benefits, which are accrued financial benefits,
will be diminished or impaired because they will be directly reduced by this tax. As
former Attorney General Frank Kelley correctly stated in an opinion of the Attorney
General:
[T]here is little question that an exemption from taxation for pension
benefits constitutes “financial benefits” within the meaning of Const 1963,
art 9, § 24, since the exemption usually will result in greater net pension
10
The majority asserts that I do not recognize the distinction between pension benefits
and tax deductions. I do recognize that there is a distinction; however, that distinction is
not the relevant inquiry in this matter. The relevant inquiry under article 9, § 24 is
whether accrued financial benefits are diminished. It is the majority that disregards that
reducing or eliminating tax deductions results in the diminishment of pension benefits,
which are accrued financial benefits.
9
payments for the recipient. In Robert Tilove’s treatise, Public Employee
Pension Funds (1976), cited with approval by Justice Williams for the
unanimous Court in Kosa v State Treasurer, 408 Mich 356, 372 n 22; see
also pp 372-373; 292 NW2d 452 (1980), the author, Tilove, in referring to
public pension income tax exemptions generally, states: “[a]n income tax
exemption has precisely the same effect as a benefit.” (At p 244.) [OAG,
1991-1992, No 6697, p 119 (December 18, 1991).]
The public-pension tax exemptions themselves have become part of the accrued
financial benefits for vested employees, and reducing or eliminating them violates the
Constitution.11 Therefore, under article 9, § 24, the Legislature cannot circumvent the
prohibition against reducing accrued financial benefits by reducing or eliminating tax
deductions unless it replaces the loss of benefits caused by the reduction or elimination of
the deductions. The result of cutting the deduction for benefits is the same as directly
cutting the benefits themselves, and it is unconstitutional. The Legislature cannot do
indirectly what the Constitution directly prohibits.
B. MCL 206.30(9) VIOLATES ARTICLE 1, § 10 OF MICHIGAN’S CONSTITUTION
The next issue is whether reducing or eliminating the statutory deduction for
vested public-pension income as described in MCL 206.30 results in a “law impairing the
obligation of contract” under article 1, § 10 of the Michigan Constitution. I conclude that
it does.
Const 1963, art 9, § 24 specifies that accrued financial benefits of public-
retirement and pension plans are constitutionally mandated and protected “contractual
11
This is true because the tax exemptions are directly tied to pension income that is
vested and is being paid to retirees. If this were a sales tax or some other form of tax not
directly tied to a constitutionally protected form of income, we would be faced with
different issues.
10
obligation[s] . . . .” Const 1963, art 1, § 10 provides that “[n]o bill of attainder, ex post
facto law or law impairing the obligation of contract shall be enacted.” Stated plainly,
article 9, § 24 creates an undiminishable, unimpairable contractual obligation with regard
to accrued financial benefits of retirement income, and article 1, § 10 prohibits the
Legislature from passing laws that impair contractual obligations. Therefore, if a
statutory provision reduces the constitutionally afforded contractual obligations
surrounding accrued financial benefits of retirement income, that statutory provision
violates these constitutional provisions.
As explained in the discussion of the previous issue, MCL 206.30(9) reduces the
accrued financial benefits of public retirement and pension plans. By reducing the
amount of benefits that public employees receive as part of the contractual obligation
owed them by public entities, MCL 206.30(9) impairs that contractual obligation. Thus,
the reduction of such benefits violates the constitutional protections afforded to
contractual obligations and must be struck down.
C. MCL 206.30(7) AND (9) VIOLATE ARTICLE 9, § 7 OF MICHIGAN’S
CONSTITUTION
The third issue before us is whether the income-based criteria for determining tax
liability in MCL 206.30 create a graduated income tax in violation of article 9, § 7 of
Michigan’s Constitution. Like the majority, I conclude that they do.
Article 9, § 7 of Michigan’s Constitution prohibits a graduated income tax. That
provision states: “No income tax graduated as to rate or base shall be imposed by the
state or any of its subdivisions.” This Court has previously stated that article 9, § 7 was
11
designed to prohibit a graduated income-tax system that is similar to the federal tax
system, in which tax rates increase as income increases. Kuhn v Dep’t of Treasury, 384
Mich 378, 389; 183 NW2d 796 (1971). The income-based criteria contained in sections
MCL 206.30(7) and (9),12 which increase tax liability for higher levels of income, are
12
MCL 206.30(7) provides:
For each tax year beginning on and after January 1, 2013, the
personal exemption allowed under subsection [MCL 206.30(2)] shall be
adjusted by multiplying the exemption for the tax year beginning in 2012
by a fraction, the numerator of which is the United States consumer price
index for the state fiscal year ending in the tax year prior to the tax year for
which the adjustment is being made and the denominator of which is the
United States consumer price index for the 2010-2011 state fiscal year.
The resultant product shall be rounded to the nearest $100.00 increment.
As used in this section, “United States consumer price index” means the
United States consumer price index for all urban consumers as defined and
reported by the United States department of labor, bureau of labor statistics.
For each tax year, the exemptions allowed under [MCL 206.30(3)] shall be
adjusted by multiplying the exemption amount under [MCL 206.30(3)] for
the tax year by a fraction, the numerator of which is the United States
consumer price index for the state fiscal year ending the tax year prior to
the tax year for which the adjustment is being made and the denominator of
which is the United States consumer price index for the 1998-1999 state
fiscal year. The resultant product shall be rounded to the nearest $100.00
increment. For a taxpayer whose total household resources are $75,000.00
or more for a single return or $150,000.00 or more for a joint return, the
personal exemption allowed under [MCL 206.30(2)] shall be adjusted by
multiplying the exemption for the tax year for a single return by a fraction,
the numerator of which is $100,000.00 minus the taxpayer’s total
household resources, and the denominator of which is $25,000.00, and for a
joint return by a fraction, the numerator of which is $200,000.00 minus the
taxpayer’s total household resources, and the denominator of which is
$50,000.00. The personal exemption allowed under [MCL 206.30(2)] shall
not be allowed for a single taxpayer whose total household resources
exceed $100,000.00 or for joint filers whose total household resources
exceed $200,000.00.
12
unconstitutional. Such criteria create a graduated income tax that effectively increases
the tax rate on the basis of a taxpayer’s income.
The supporters of MCL 206.30 argue that it does not directly create higher tax
rates for higher levels of income because the tax rate remains flat at 4.35 percent. The
supporters argue that it is irrelevant whether the effective tax rate increases as “household
resources”—meaning income—increase, as long as the 4.35 percent tax rate remains
intact. However, the argument that MCL 206.30 is constitutional because it does not
directly do what the Constitution prohibits is unpersuasive. In Butcher v Dep’t of
Treasury, 425 Mich 262, 273; 389 NW2d 412 (1986), this Court stated:
It is clear that in Kuhn, by closely examining the credits, exclusions,
and exemptions there challenged, we at least implied that a constitutional
violation can occur by the use of income criteria for determining their
amounts. The reduction of a credit . . . would be no exception to such an
implication, if . . . it was determined that such a reduction was influenced
by income bracketing, and such factors affected the income tax liability.
While the income-based criteria in MCL 206.30(7) and (9) do not directly increase the
tax rate or base proportional to income level, the effect of imposing those criteria is to
create a graduated tax rate tied to income level.
For example, consider two single retirees born after 1952 who have reached the
age of 67. Retiree A earns $100,000 a year, and Retiree B earns $50,000 a year. Under
MCL 206.30(9), Retiree A is not entitled to a $20,000 deduction in taxable income
because he or she makes more than $75,000, while Retiree B makes less than $75,000
and is entitled to the deduction. Thus, Retiree B only pays taxes on $30,000 of taxable
income. With a tax rate of 4.35 percent on taxable income, Retiree A pays $4,350 in
taxes, which is an effective rate of 4.35 percent on $100,000. Meanwhile, Retiree B pays
13
$1,305 in taxes, which is an effective rate of 2.61 percent on $50,000. The result is a
graduated tax rate based on level of income. The same calculations produce similar
results for the income-based reduction and elimination of personal exemptions for all
taxpayers found in MCL 206.30(7). All income-based criteria for limiting and restricting
taxable income using income brackets are unconstitutional.
Accordingly, I would hold that both MCL 206.30(7) and (9) are unconstitutional.
D. THE MAJORITY’S RESOLUTION
The final issue is one created by the majority’s perplexing resolution of this case,
in light of its holding that MCL 206.30(7) and (9) violate the Constitution. I agree with
the majority that the income-based factors in subsections (7) and (9) unconstitutionally
create a graduated income tax. However, I disagree with the troubling method that the
majority has chosen to resolve the Governor’s questions with regard to the
constitutionality of those subsections. Rather than striking down those subsections, the
majority carves out the sentences from subsections (7) and (9) that limit personal
exemptions and deductions on the basis of income.13 In doing so, the majority has
created entirely different laws than those passed by the Legislature and signed by the
Governor. Specifically, the majority provides judicially created tax exemptions and
deductions, despite the fact that the Legislature did not provide such tax breaks. The
majority’s decision changes the tax code and now allows individuals earning more than
$75,000 annually, and couples earning more than $150,000 annually, to have their tax
liability reduced. This is the opposite of what the Legislature intended.
13
For the majority’s new tax policies, see ante at 47-49.
14
The majority claims that it is simply severing the unconstitutional portions from
the statute. However, the statutory rules of severability do not permit such an outcome.
Those rules are contained in MCL 8.5, which provides:
In the construction of the statutes of this state the following rules
shall be observed, unless such construction would be inconsistent with the
manifest intent of the legislature, that is to say:
If any portion of an act or the application thereof to any person or
circumstances shall be found to be invalid by a court, such invalidity shall
not affect the remaining portions or applications of the act which can be
given effect without the invalid portion or application, provided such
remaining portions are not determined by the court to be inoperable, and to
this end acts are declared to be severable. [Emphasis added.]
Under these rules, this Court must consider whether an entire section has to be struck
down or whether the unconstitutional portions of that section can be severed from the
remainder of the statute. Unconstitutional language can be severed when “the remaining
portions are not determined by the court to be inoperable . . . .”14 However, that only
applies if the remaining portion of the statute is not “inconsistent with the manifest intent
of the legislature . . . .”15
In this matter, the majority attempts to justify its result by stating that the
Legislature was aware that portions of 2011 PA 38 could be held unconstitutional and
that those portions could be severed to keep the rest of the act constitutional. The
majority asserts that members of the Legislature would have known which words from
14
MCL 8.5.
15
Id.
15
each section it passed could be held unconstitutional. This is groundless guesswork by
the majority.
Moreover, the majority attempts to justify its restructuring of sections MCL
206.30(7) and (9) by arguing that the Attorney General requested this remedy in the brief
supporting the law. This argument overlooks a fundamental tenet of statutory analysis:
the Court’s primary obligation is to ascertain legislative intent.16 The Legislature duly
enacted this statute, and the Governor signed it into law. We have a clear indication of
what the Legislature intended when it limited personal exemptions and deductions of
retirement income: the actual language of the statute before us.17 Given the language of
MCL 206.30(7) and (9), it is indisputable that the Legislature intended to determine tax
liability on the basis of factors such as age and income, and it is also indisputable that the
Legislature chose not to grant exemptions and deductions to taxpayers in higher income
brackets. Raising or lowering tax liability is a highly political undertaking in this state.
16
People v Hill, 486 Mich 658, 667; 786 NW2d 601 (2010).
17
In Sun Valley Foods Co v Ward, 460 Mich 230, 236; 596 NW2d 119 (1999), we stated:
The foremost rule, and our primary task in construing a statute, is to
discern and give effect to the intent of the Legislature. Murphy v Michigan
Bell Telephone Co, 447 Mich 93, 98; 523 NW2d 310 (1994). See also
Nation v W D E Electric Co, 454 Mich 489, 494; 563 NW2d 233 (1997).
This task begins by examining the language of the statute itself. The words
of a statute provide “the most reliable evidence of its intent . . . .” United
States v Turkette, 452 US 576, 593; 101 S Ct 2524; 69 L Ed 2d 246 (1981).
If the language of the statute is unambiguous, the Legislature must have
intended the meaning clearly expressed, and the statute must be enforced as
written. No further judicial construction is required or permitted. Tryc v
Michigan Veterans’ Facility, 451 Mich 129, 135; 545 NW2d 642 (1996).
16
The Legislature, for its own policy reasons, chose not to lower the tax liability of
individuals earning more than $75,000 annually and couples earning more than $150,000
annually, and it incorporated language into MCL 206.30 to fulfill this intention. While
that policy decision was unconstitutional, it is not the place of this Court to make tax
policy choices for the Legislature by severing parts of the sections at issue. In so doing,
the majority expands the exemptions and deductions contemplated by the Legislature.
Such a result is clearly against the intent of the Legislature.
In this advisory matter, the Governor asked this Court to opine on whether MCL
206.30(7) and (9) are unconstitutional. Our proper role is to advise the Governor if either
of these subsections violates the Constitution. Now that we have done so, it is up to the
Legislature to determine whether the Income Tax Act should be redrafted—and, if so,
how—in light of our ruling. Accordingly, I would follow the established rules of
statutory construction and refrain from judicially creating deductions and exemptions that
the Legislature clearly did not intend. I would leave to the Legislature the important role
of deciding the best tax policy for the citizens of this state and limit the judiciary to its
proper role of reviewing statutes to determine whether they are in accordance with our
Constitution.
II. CONCLUSION
I would hold that MCL 206.30(9) is unconstitutional because it clearly violates
article 9, § 24; article 1, § 10; and article 9, § 7 of Michigan’s Constitution. Furthermore,
I would hold that MCL 206.30(7) is unconstitutional because it also clearly violates
article 9, § 7 of Michigan’s Constitution. The majority not only fails to strike down parts
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of MCL 206.30 that are clearly unconstitutional, but also redrafts parts of this statute to
provide tax exemptions and deductions that the Legislature clearly did not intend.
In sum, I would follow the established rules of statutory construction and refrain
from judicially creating deductions and exemptions for individuals earning more than
$75,000 annually and couples earning more than $150,000 annually, which the
Legislature clearly did not intend. Moreover, I would leave to the Legislature the
important role of deciding the best tax policy for the citizens of this state and properly
limit the judiciary’s role to reviewing statutes to determine whether they are in
accordance with our Constitution. Because the majority usurps this important legislative
function in its decision today, I dissent.
Diane M. Hathaway
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