Michigan Capitol | Susan J. Demas
A pair of GOP-sponsored bills would result in an estimated $1.7 billion drop in state tax collections by cutting the personal income tax rate for state residents while offering sweeping tax breaks on retirement income.
The bills were approved Thursday by the House Tax Policy Committee and House Appropriations Committee.
House Bill 5838, sponsored by Rep. Matt Hall (R-Marshall), would cut Michigan’s income tax rate from 4.25% down to 3.9% for individuals. It would also raise the tax threshold on retirement income while simultaneously lowering the age of eligibility from 67 to 62.
A bipartisan plan raising Michigan’s income tax from 3.9% to 4.35% was signed in 2007 by Democratic Gov. Jennifer Granholm as Michigan’s tax revenue plummeted during a decade-long recession. That rate was scheduled to start rolling back, but GOP former Gov. Rick Snyder froze the rate at 4.25% to help pay for his 2011 business tax cut.
Hall, who chairs the Tax Policy Committee, said his plan would be more equitable in providing tax relief.
“Whether it’s at the gas station, grocery store, pharmacy, or many other places involving everyday necessities, workers and seniors are all feeling the impacts of inflation,” Hall said. “And they all need relief – not just some. Previous plans from the governor and the Senate have touched on some level of relief, but I feel we can go farther and do more for more people with the resources we have available.”
The bill was part of a one-two punch put forward by House Republicans. The second part, House Bill 5054, would set aside $1.5 billion to reinforce local and state pension plans while also helping to pay down state debt.
It was sponsored by Appropriations Committee Chair Thomas Albert (R-Lowell), who said it was necessary to keep pension plans solvent.
“Tax relief for seniors won’t do much good if their pensions run out of money – these reforms go hand-in-hand,” Albert said. “Debt related to government employee retirement systems is a cancer destroying local government finances across Michigan. We have a unique opportunity to improve local government finances over the long run by reducing debt, and that ultimately helps everyone – employees who are counting on the retirement benefits promised to them, and community members who rely on public services every day. And we would do this without asking our children and grandchildren to foot the bill for services they aren’t going to receive.”
However, the nonpartisan House Fiscal Agency expected the income tax cut and retirement income exemptions would result in an approximately $1.7 billion drop in the state’s General Fund revenue by Fiscal Year 2024.
House Democrats said that outcome wasn’t worth it. In a tweet Thursday, they stated that House Bill 5838 “would provide low-income earners a $12 tax cut, middle-income earners a $92 tax cut, and the top 1% a $4,900 tax cut,” adding that the bill will “give the most benefit to the people who need it the least.”
They also noted that because federal pandemic relief dollars cannot be used for tax cuts, “the bill would reduce available revenue for the budget negotiations by $2.4 billion in the 2023 state budget and cost the state $1.7 billion dollars the following year–and likely each year going forward.”
That sentiment was echoed by Monique Stanton, president and CEO of the Michigan League for Public Policy (MLPP).
“Now that everyone’s tax proposals are on the table, the stark contrast is clear,” she said “Gov. Gretchen Whitmer has proposed targeted tax relief for residents who are struggling the most by increasing the EITC, and historic budget investments in all of the areas kids, residents, businesses and communities rely on. Legislative Republicans are pushing for sweeping, across-the-board tax cuts that primarily benefit the wealthiest residents and businesses while significantly decimating our current and future state budgets in the process.”
The Michigan Senate last week passed a similar package that would not only decrease the individual income tax rate to 3.9%, but also cut the corporate income tax from 6% to 3.9%.
An analysis from the nonpartisan Senate Fiscal Agency indicated the plan would result in a more than $2 billion drop in tax revenue over the next two years.
Gov. Gretchen Whitmer, who recently proposed a $74 billion Fiscal Year (FY) 2023 budget plan, referred to the proposed cuts as “not sustainable.”
Her tax relief plan is boosting the state’s Earned Income Tax Credit (EITC) for working families from 6% to 20% of the federal rate and eliminating the tax on pension income signed by Snyder in 2011 as part of his business tax cut plan.
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