Michigan Senate passes income tax cut. Its path forward is unclear.

LANSING — Michigan Senate Republicans on Tuesday approved a $2 billion dollar tax cut proposal that would lower both personal and corporate income tax rates and provide tax relief for senior citizens and children. 

The vote was split 22-16 along party lines.

The Republican proposal, Senate Bill 768, would lower the state income tax rates to 3.9 percent from 4.25 percent for individuals and 6 percent for corporations. The plan would also offer a $500 tax credit per child under the age of 19.

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GOP lawmakers argued the plan would bring tax relief for all Michigan families as the state continues to recover from the economic impact of the COVID-19 pandemic.

All Senate Democrats opposed the measure, arguing it would further shift tax burdens from corporations onto regular taxpayers. The income-tax savings for an individual making $70,000 would amount to $228 per year if the plan passes.

Tax cut fever is raging in Lansing as officials debate how to spend down a $7 billion state revenue surplus and another $7 billion in federal stimulus funds. Democratic Gov. Gretchen Whitmer has pitched smaller and targeted tax cuts as part of a massive $74.1 billion budget proposal that Republicans have criticized.

The Senate’s proposal could face hiccups in the House, which is also controlled by Republicans.

“The House is putting together its own proposal,” said Gideon D’Assandro, spokesperson for House Speaker Jason Wentworth, R-Farwell. “Speaker Wentworth would like to focus more on helping families and seniors who are struggling with ridiculously high inflation and the cost of living.”

House Appropriations Chair Thomas Albert, R-Lowell, has said he does not want to use federal stimulus funds to pay for any cuts because "it's expressly not allowed” under the law approved last year by Congress.

Albert anticipates the state can cut roughly $800 million in annual tax collections and not run afoul of federal regulations, he said last week on WKAR-TV's Off the Record.

But the House will still consider cuts, including an income tax rate rollback, expansion of the personal exemption for individual tax deductions, property tax relief and commercial personal property tax relief, according to Albert.

"There's really a lot of options on the table," he said. 

Whitmer, a Democrat who is up for re-election in November, could veto Republicans’ plans and has proposed her own cuts.

She wants to phase out what’s known as the “pension tax” — a tiered system applying a 4.25-percent income tax on pensions depending on when the taxpayer is born — and to reverse a 2011 cut to the Earned Income Tax Credit for lower income workers.

“These are hardworking people who had the rug pulled out from under them when the previous administration raised taxes on Michiganders,” Whitmer spokesperson Bobby Leddy said in a Tuesday statement. “We can start with making things right again by eliminating the retirement tax to give seniors a much-needed break and cutting taxes for working families.”

Senate plan explained

Beyond the income tax reduction, the Senate proposal was amended Tuesday to include tax reliefs for senior citizens ages 67 and older. It would lower the taxable income by $30,000 for senior individuals and $60,000 for senior couples. 

The tax cut would reduce Michigan’s revenue by $1.8 billion in fiscal year 2022, $2.5 billion in fiscal year 2023 and $2.6 billion in fiscal year 2024, according to a fiscal analysis by the Legislature. The revenue loss is estimated to increase in later years, the analysis says.

Michigan collected $31.4 billion in taxes and fees during fiscal year 2020, according to the state's comprehensive financial report. Of that, roughly $10 billion is in individual income tax, while $1 billion is from corporate income tax, state records show.

Republicans say the tax cut will boost the economy and absorb the lost revenue.

“The state’s budget has grown by $30 billion over the last 10 years,” said Speaker Pro Tem Aric Nesbitt, R-Lawton, who is sponsoring the tax cut.

“When you cut taxes … you grow the economy, you add more people. We’ve got to get grown again. We can’t just keep slicing up the same size of the pie. We’ve got to grow that pie in the state of Michigan.”

He showed Bridge Michigan estimates showing the state would collect $1.1 billion less in personal income taxes annually and $465.5 million less in corporate income taxes in fiscal year 2023.. 

The state would pay out roughly $750 million to $800 million in child tax credits and lose another annual $100 million in retirement income taxes, the analysis shows.

“Eighty percent of the relief is going to working families and small businesses here in Michigan and retirees,” Nesbitt said. “This is about competing and winning against other states next to us.”

Senate Democrats argued the plan mainly benefits big corporations. 

“Small businesses that have truly struggled during the pandemic would virtually get nothing under this proposal,” said Senate Minority Leader Jim Ananich, D-Flint. “Meanwhile, this bill allows the richest, the most profitable corporations, in other words, big campaign donors to enjoy a break that is six times larger.”

Ananich unsuccessfully sponsored an amendment that would have removed the corporate income tax break and repealed retirement tax once and for all. 

Sen. Jeremy Moss, D-Southfield, said on the floor the Republican-backed plan would put more financial strain on regular taxpayers instead of corporations.

“Legislative Republicans who have spent a decade bemoaning, decrying, assailing the pension tax that they themselves created are setting up the exact same framework to further shift our tax burden off of corporations and onto Michigan residents,” Moss said. 

State records show the tax burden has swung to individuals since 2011, when former Gov. Rick Snyder established a flat corporate tax rate of 6 percent. 

Michigan collected about $541 million in business taxes in fiscal year 2020, down from $1.4 billion in 2011. Personal income tax revenue increased from $6.4 billion to $10.5 billion over the same span.

Whitmer’s proposal 

Whitmer said last week she is open to negotiating tax policy with Republicans but said her focus is on “making our tax code more fair.”

The governor has proposed doing so by reversing a pair of tax changes made in 2011 under Snyder and the Republican-led Legislature.

The first-term Democrat wants to repeal the "pension tax," which expanded taxation of retirement income. She also wants to reverse a cut to the Earned Income Tax Credit for lower income workers.

Phasing out the so-called pension tax over the next four years, as Whitmer has proposed, would cost the state $13 million in the current tax year and $495 million annually by 2025, according to the Whitmer administration.

The State Budget Office estimates that nearly 500,000 households would save an average of $1,000 if the state restores tax exemptions for retirement income.

Restoring the state's Earned Income Tax Credit to 20 percent of the federal level, up from the current 6 percent, would benefit an estimated 750,000 households but cost the state an $262 million in revenue.

Expanding the Earned Income Tax Credit for lower income workers to benefit an estimated 750,000 households, as Whitmer has also proposed, would cost an estimated $262 million in fiscal year 2023 and beyond.

Michigan is flush with federal stimulus funds, but the money comes with conditions.

Congress specified that American Rescue Plan Act funding cannot be used to offset tax cuts. Some states have sued over the restriction, and a federal judge in Alabama has called it unconstitutional.

The Whitmer administration is wary of running afoul of the federal stimulus law and wants to make sure Michigan is not required to pay back any funds because of misuse, said Budget Director Chris Harkins.

Whitmer's proposed tax cuts would be phased in and paid for by projected state revenue gains, according to Harkins, which means Michigan would not need to use any federal stimulus funds to offset the changes.

"We’re comfortable that (Whitmer's) proposal doesn't cause any troubles with requirements" of the federal stimulus law, Harkins said last week.

He contended that any larger Republican tax cut proposal that would require the state to cut spending would be an "area of concern" because of federal regulations.