How Gov. Gretchen Whitmer, Democrats plan to cut Michigan taxes in 2023
- Whitmer, Democrats to repeal a 2011 ‘pension tax’ and expand Earned Income Tax Credit
- Expanding credit would save 700K families more than $300 per year
- Repealing pension tax would save 500K retirees about $1,000 per year
LANSING — Gov. Gretchen Whitmer may have vetoed Republican tax cut plans during her first term, but she is preparing to team with incoming Democratic majorities on narrower tax relief proposals next year.
Tops on her list: Expanding the Earned Income Tax Credit for low- and middle-income workers, and repealing the so-called pension tax for seniors.
“None of this happens in a vacuum, but those are a couple things that I think continue to be real priorities for me,” Whitmer told Bridge Michigan last month after winning election to her second term and helping flip the Legislature.
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Combined, Whitmer’s tax cut plans would benefit more than 1.2 Michigan families. Some 700,000 households that would be in line to save more than $300 annually under an expanded Earned Income Tax Credit (EITC), while about 500,000 retirees would save about $1,000 per year in pension taxes.
The cost to the state: about $757 million per year in revenues, according to projections from Whitmer’s office.
Whitmer told Bridge she has no plans to try again to raise fuel taxes to pay for road repairs, as she attempted in her first term before borrowing money instead.
Democratic lawmakers say more aggressive tax code changes — such as taxing the rich at higher rates or expanding corporate taxes — are unlikely given their slim, two-seat majorities in both the House and Senate.
"Because it's been 40 years since Democrats have had control of Lansing, there are so many sensible and relatively easy and very important changes that we can make that will really help people in Michigan," said Sen. Jeff Irwin, D-Ann Arbor.
"So some of those more difficult, more thorny, more complicated conversations around tax policy are going to be harder to get done because there's just so much work to do.”
‘A targeted way’
Whitmer’s plans would reverse changes made by her Republican predecessor, Gov. Rick Snyder, who in 2011 worked with a GOP-led Legislature to reduce the Earned Income Tax Credit for lower-income workers and eliminate exemptions for public and private pensions.
The GOP overhaul came amid a budget deficit and shifted the state’s overall tax burden from business to individuals. At the time, the plan was projected to raise personal income taxes by $1.4 billion while cutting business taxes by $1.6 billion, saving the state about $224 million overall.
Michigan collected $11.4 billion in personal income taxes for 2020, which accounted for about 36 percent of all state tax collections. That was up from $6.9 billion and 30 percent of all tax collections a decade earlier, according to data from the non-partisan Senate Fiscal Agency.
Flush with a budget surplus that is roughly $6 billion and growing, Whitmer and outgoing GOP legislative leaders this year proposed a series of competing tax cut plans but were ultimately unable to find common ground.
The governor vetoed Republican bills that would have cut the state’s 4.25 percent income tax for all earners, saying the changes would create too big a hole in the state’s $77 billion budget.
Michigan’s economic outlook "is maybe a little better" than when Whitmer vetoed the GOP tax plans earlier this year, and incoming state revenues "somehow just keep improving,” said Bob Schneider, a senior research associate for the non-partisan Citizens Research Council of Michigan.
That means Michigan is well positioned to pay for Whitmer's preferred tax cuts, and could also likely afford to do “some of the things that Republicans were advocating for," Schneider told Bridge.
"The long-term outlook for the state budget is probably as good as it's been in decades," he said.
Incoming House Speaker Joe Tate, D-Detroit, and Senate Majority Leader Winnie Brinks, D-Grand Rapids, told Bridge they are on board with both proposals.
“Those things are two very powerful ways to help folks make ends meet,” Brinks said, noting she wants to approach pending tax code policy talks in a “fiscally responsible” way.
“When we talk about tax relief, we want to make sure that we're doing that in a targeted way that makes a difference for the people who need it the most.”
Some Republicans will likely vote for Whitmer's narrower plans but would still prefer larger tax cuts, said Sen. Jim Runestad, R-White Lake, who chaired the Senate Finance Committee this term.
The governor is unlikely to back GOP plans to cut the personal income tax rate or roll back corporate income taxes, he acknowledged.
"They're always wanting to spend, spend, spend," he said of Democrats, predicting they’ll use up much of the state's $6 billion surplus on government programs. "They've got dreams of all the stuff they want to spend money on."
Who would benefit?
Whitmer had hoped the GOP-led Legislature would vote to restore the Earned Income Tax Credit this month by raising the maximum credit from 6 percent of the federal version to 20 percent. But lawmakers ended their year without a deal, meaning taxpayers likely can’t see a benefit until their filings in 2024.
Restoring the credit to 2011 levels would benefit more than 700,000 households, according to recent data from the state Treasury. Had the rate gone up for the 2022 tax year, the average state credit would have risen to $450, up from $130.
The credit is larger for the lowest earners. Taxpayers who earned less than $57,414 last year qualified for the federal version of the tax credit, averaging savings of about $2,467 in Michigan.
The EITC was created in 1975 under President Gerald Ford as a way to reward work and offset Social Security payroll taxes. It was expanded in 1986 under President Ronald Reagan.
It’s a “conservative idea” that Republicans should still embrace, especially now given ongoing employer struggles to fill job openings, said Lou Glazer, president of Michigan Future Inc., who had urged lame-duck action.
“All of the evidence is that the Earned Income Tax Credit is an effective incentive to go back to work,” Glazer said on a recent media call.
“Whether you’re Democrat or Republican, that money is going to help out our economy, and it’s going to help out our businesses,” added Kent County Treasurer Pete MacGregor, a Republican former state senator.
Runestad, the Republican who chaired Senate Finance Committee this term, said he generally supports expanding the credit but is concerned about fraud. The IRS estimated that 28 percent of the federal credits were improperly awarded in 2021.
Expansion of the state credit would help taxpayers across Michigan but have the largest impact in lower-income regions, including both urban areas like Detroit and rural ones like Lake, Oscoda and Clare counties, where more than 1 in 5 filers qualified for the credit in 2019.
Michigan is one of 34 states that have a local version of the Earned Income Tax Credit, according to the National Conference of State Legislatures. Most states offer more than Michigan.
In the Great Lakes, Minnesota offers credits worth up to 45 percent of the federal version, Ohio 30 percent, Illinois 20 percent and Indiana 9 percent. Only Louisiana (5 percent), Oklahoma (5 percent) and Montana (3 percent) offer smaller credits than Michigan.
In 2010, before the credit was scaled back, about 783,000 Michigan tax filers qualified for an average credit of $435, which cost the state $340.8 million.
In 2019, 738,377 households qualified for an average credit of $150, which cost the state $110 million total.
The Whitmer administration estimates that restoring Michigan’s credit to 20 percent of the federal version would cost the state about $262 million per year.
A pension tax promise
Whitmer has called for repeal of the so-called pension tax since her 2018 campaign, and last year proposed a three-year phase out of the 2011 law that expanded taxation of retirement income and pension benefits.
The governor’s plan would again exempt all public pensions and restore deductions for other retirement income, including private-sector pensions, IRA withdrawals and the employer match portion of 401Ks.
Ending the pension tax has been a “constant” goal for Democrats, said Tate, the Detroiter who will serve as House speaker next term.
Michigan had not taxed pensions until 2011, and Democrats argued that beginning to do so was unfair to seniors who had retired with expectations their fixed income would not be subject to the state's 4.25 percent income tax.
Instead, the state now provides exemptions of up to $20,000 for an individual or $40,000 for joint filers on any form of income for taxpayers age 67 and older.
Whitmer last year vetoed Republican legislation that would have doubled those exemption thresholds. Doing so would have benefited all seniors regardless of their income sources, said Runestead, who led tax policy for Senate Republicans.
Simply repealing the pension tax would be a sop to unions who contribute heavily to Democratic campaigns, Runestad argued.
“She wants to tell the unions, ‘Listen, I've targeted you specifically for a benefit that the rest of the population doesn't get,’" he said.
But Whitmer’s plan is broader than just pension taxes, noted Schneider, who worked in the State Budget Office before joining the non-partisan Citizens Research Council.
It would cover “a lot of typical retirement income,” including IRA withdrawals and the portion of a 401k subject to an employer match, he said.
The administration estimates that nearly 500,000 households would save an average of $1,000 per year under the governor's plan. Once fully phased in, the tax cut would cost the state about $495 million per year in lost revenues.
It’s not clear what region of the state might benefit the most from the retirement income exemptions proposed by Whitmer.
The state Treasury does not have detailed data on who currently pays those taxes because it currently calculates liability based on federal Adjusted Gross Income, which includes retirement and pension income.
Whitmer's proposed tax exemptions would apply to anyone with qualified retirement income, regardless of age, but would primarily benefit seniors.
Big counties like Wayne, Oakland and Macomb have the largest number of people over the age of 65. But by percentage, rural northern counties like Alcona and Keewenaw are the oldest in the state.
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