Wisconsin Lawmaker Dusts Off Pension Tax Break

February 2, 2004 (PLANSPONSOR.com) - A Wisconsin state legislator is trying again with his proposal to shelter the first $5,000 of pension fund earnings, but not assets from 401(k) plans or IRA accounts.

It will be the third time Wisconsin State Senator Bob Wirch, (D-Kenosha), has introduced the legislation, which carries a high price tag – at least $100 million a year according to the state’s Legislative Fiscal Bureau last legislative session, the Wisconsin State Journal reported. Wirch’s proposal was referred to the Joint Survey Committee on Tax Exemptions the past two sessions, where it languished.

Despite a tight state budget, Wirch said Wisconsin should look at the added expense of exempting at least $5,000 in pension earnings before the state starts losing more than the exemption will cost.

“I hear from seniors in our border community that it’s time Wisconsin makes the same effort as Illinois to provide seniors with this type of program,” Wirch said in a press release announcing his bill. “Costs for this plan would be more than balanced out by seniors who would continue to pay taxes and generate revenue here because they have an incentive to stay in Wisconsin after retirement.”

Under current Wisconsin law, some pension benefits are already sheltered from tax. They include payments received from the US civil service retirement system, the US military employee retirement system, the Milwaukee city and county retirement systems, the police officer’s annuity and benefit fund of Milwaukee, the Milwaukee public school teachers’ retirement fund, the Wisconsin state teachers’ retirement fund and the sheriff’s annuity and benefit fund of Milwaukee County, according to the Legislative Reference Bureau. For all of these pension plans, the exemption applies only to people who were members of or retired from the plans as of Dec. 31, 1963.

Illinois exempts the full retirement benefit while Iowa exempts the first $6,000. Wirch’s $5,000 exemption would provide an average savings of about $350.

The State Journal quotes the non-partisan National Conference of State Legislatures as reporting that 10 states; Alabama; Hawaii; Illinois; Kansas; Louisiana; Massachusetts; Michigan; Mississippi; New York and Pennsylvania exclude all federal, state and local pension income from taxation. These 10 states differ on the taxation of retirement income from private-sector sources, the conference says on its Web site. Kansas and Massachusetts do not exclude any private-sector retirement income, but most of the others allow a fairly broad exclusion:

  • Pennsylvania allows a full exclusion
  • Alabama excludes income from defined benefit plans
  • Hawaii excludes income from contributory plans
  • Illinois and Mississippi exclude income from qualified retirement plans
  • Louisiana , Michigan and New York cap the private-sector exclusion at $6,000, $34,920 and $20,000, respectively.