Search for new revenue has some states looking at retirement income

Soon after Rick Snyder introduced his first proposed budget as Michigan’s governor, lawmakers were being inundated with phone calls about one idea in particular: taxing the pension income of retirees.

Stateline Midwest: Vol. 20, No. 4: April 2011

Soon after Rick Snyder introduced his first proposed budget as Michigan’s governor, lawmakers were being inundated with phone calls about one idea in particular: taxing the pension income of retirees.

This change in state tax law would raise about $900 million, The Detroit News reports. Michigan isn’t the only state where such a change is being contemplated. In March, Illinois Senate President John Cullerton said a taxation of retirement income should be considered as part of an effort to modernize his state’s overall tax structure, the Chicago Tribune reports.

According to the Retirement Living Information Center, Michigan, Illinois and Kansas are among the 10 U.S. states that exclude all federal, state and local pension income from taxation. Kansas does not exclude private-sector retirement income; most other states in this group of 10 “allow for a fairly broad exclusion” of income from private pensions, the center reports.

In a majority of states — including Illinois, Indiana, Michigan, Ohio and Wisconsin — Social Security retirement benefits are excluded from state income taxes. Iowa is in the process of phasing out its tax on Social Security retirement benefits.