Updated: House, Senate pass bills to boost Earned Income Tax Credit, repeal pension tax

Updated, 11:46 a.m., 1/27/23

The Democratic-controlled Michigan Senate on Thursday approved measures to boost the state’s Earned Income Tax Credit (EITC) and repeal Michigan’s so-called pension tax, bringing both longtime Democratic priorities one step closer to Gov. Gretchen Whitmer’s desk.

Both pieces of legislation were met with Republican pushback but received some GOP votes on final passage.

Later on Thursday, the House passed its own EITC and pension tax bills. 

Earned Income Tax Credit

Sponsored by state Sen. Kristen McDonald Rivet (D-Bay City), Senate Bill 3 would boost the EITC (also known as the Working Families Tax Credit) for lower-income workers from 6% to 30% of the federal credit beginning with the 2023 tax year. It also applies retroactively to 2022.

Another step closer! MI Senate just passed #WorkingFamiliesTaxCredit increase to 30%, sending SB-3 to MI House. I’m proud to carry voices from across Michigan in sharing why this is needed, and just how much it means to our families, employers & local economies. #EITC #MILeg pic.twitter.com/sfcl6mtzqQ

— Senator Kristen McDonald Rivet (@McdonaldRivet) January 26, 2023

The EITC was originally enacted in Michigan in 2006 and set at 10% of the federal credit, before being increased to 20% in the 2009 tax year. It was then reduced to 6% in 2011 under former Gov. Rick Snyder as part of his tax reform plan that also cut business taxes $2 billion annually.

A bill attempting to gradually increase the EITC to 30% was introduced in 2021 but failed to gain traction, despite some bipartisan support. Other bills attempting to modify it in recent years have either similarly failed or been vetoed.

SB 3 passed the Senate 27-11, with seven Republicans joining Democrats to vote in favor of the bill.

“In short, this puts money in the pockets of working families now when they need it the most,” Mcdonald Rivet said during Thursday’s session. “Decades, literally decades of research indicate that families mostly use the EITC to pay for repairing homes, maintaining vehicles, education [and more].”

However, some Republican lawmakers rebuffed the EITC expansion as a “magnet” for “waste, fraud and abuse,” as characterized by state Sen. Jim Runestad (R-White Lake). Runestad suggested, without evidence, that illegal immigrants will abuse the program. 

The tax cut will impact state revenues.

According to the nonpartisan Senate Fiscal Agency, SB 3 would reduce General Fund revenue by about $441.6 million per year while not affecting the School Aid Fund.

The bill earned praise from small business and family groups, including Prosperity Michigan, People First Economy and Mothering Justice.

SB 3 “will have a direct impact by lifting working people out of poverty and giving them more income to spend on food, medication, utilities and other basic necessities that many people in our state are often forced to choose between,” said Hugh Madden, executive director of Prosperity Michigan.

“Mamas and caregivers across Michigan will benefit from the expansion of this tax credit for hard-working Michiganders,” said Eboni Taylor, Michigan executive director of Mothering Justice. “The credit can help improve the quality of life for their children by having the money to buy more necessities.

“This could be the difference between a mother deciding between buying asthma medication for her child and paying the heating bill. Mothers shouldn’t have to struggle to pay for the necessities their children need.”

A House bill, HB 4002, passed on Thursday as well. That measure would also boost the EITC to 30%, with certain guidelines for taxpayers claiming EITC credit in the 2022 tax year. The vote was 100-8.

A final bill will have to be approved before heading to Whitmer, who reiterated her support for an EITC hike  in her State of the State address Wednesday night. She is expected to sign the legislation if it hits her desk.

Pension tax

Senate Bill 1 is sponsored by Sen. Kevin Hertel (D-St. Clair Shores) and addresses the state’s tax on retirement income. That measure was also part of Snyder’s 2011 tax plan.

“Today is about restoring a promise to retirees,” said state Sen. Mary Cavanaugh (D-Redford Twp.). “Today is about undoing a decade-long tax that upended seniors’ financial plans and put vulnerable seniors in jeopardy.”

Although Republicans have touted their own plan on the pension tax, many took issue with SB 1.

A number of Republican-introduced amendments to the bill failed, including an amendment from state Sen. Jonathan Lindsey (R-Coldwater) that would replace the current personal income tax rate of 4.25% with 0%.

Republicans like failed GOP gubernatorial nominee Tudor Dixon have been pushing to scrap the state’s income tax. The personal income tax brought in $14.5 billion during Fiscal Year 2021, per the Michigan Department of Treasury in May and is one of the biggest sources of state tax revenue. That’s roughly 20% of the state’s $76 billion FY 2023 budget and would require huge cuts to programs, services and jobs. 

In his no-vote explanation for SB 1, state Sen. Thomas Albert (R-Lowell) said the execution in the plan “falls far short” for being too complicated and unfair to certain seniors.

“We should provide relief to all seniors, not just a select few,” said Senate Minority Leader Aric Nesbitt (R-Porter Twp.).

But Hertel pushed back on those claims, stating instead that “winners and losers were picked in 2011 when corporations won and retirees across our state lost.”

The bill passed 23-15, with state Sens. John Damoose (R-Harbor Springs), Mark Huizenga (R-Walker) and Michael Webber (R-Rochester Hills) voting with Democrats.

The House also passed its own version on Thursday, HB 4001 on a 67-41 vote. The bill gradually rolls back the tax. For the 2026 tax year, the pension tax tier system under the bill would be eliminated altogether and all taxpayers would be able to claim the maximum deduction of retirement and pension benefits. It would also change the percentage of income tax collection that is deposited in the School Aid Fund.

The House and Senate will need to agree on a version before the legislation heads to Whitmer, who also endorsed the measure in her State of the State.