Michigan House GOP proposal: cut state budget to lower taxes

LANSING — Michigan House Republican leaders want lower income tax rates for workers and retirees in the state — and they are willing to cut the state budget to sustain it.

House Republicans on Thursday unveiled a tax cut proposal — House Bill 5838 — that would lower the individual income tax rate from 4.25 percent to 3.9 percent, a tax cut that would save a worker earning $70,000 a year $228 annually.

The plan would also allow seniors 62 years and older to deduct up to $40,000 from their income taxes annually, or $80,000 for joint filers.

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Supporters of the plan — such as House Tax Policy Committee Chair Matt Hall, R-Marshall, and House Appropriations Committee Chair Thomas Albert, R-Lowell — said the plan prioritizes working families in Michigan.

“Under this plan, everyone benefits. All workers, all seniors, all families,” Hall told reporters Thursday after he unveiled the proposal at a joint hearing between the House appropriations and tax policy committees.

Critics, however, argue the plan would direct more tax relief toward wealthier Michiganders than to low- and moderate-income workers. Alex Rossman, spokesperson for Michigan League of Public Policy, which opposes the proposal, said in a press release Thursday.

Under the House plan, an individual making $20,000 annually would save $52.85 in state taxes, whereas someone making $400,000 annually would save $1,382.85.

“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,” Monique Stanton, president and CEO of Michigan League of Public Policy, said in a statement.

The House GOP plan is the latest of several rivaling proposals as tax cut talks hit fever pitch in Lansing. Michigan Senate Republicans have rolled out a plan to offer tax relief to corporations, individual workers and seniors. Democratic Gov. Gretchen Whitmer, who criticized the Senate plan as “not sustainable,” has pledged to repeal the state’s “pension tax” — a tiered-system that taxes retirement income based on when the taxpayer is born — and increase the Earned Income Tax Credit for low-income workers. 

The state’s final budget is likely to change from the proposals made so far by the House, Senate and governor’s office, as Republican leaders in the Legislature and the Democratic governor negotiate a deal. 

“Governor Whitmer has always said that she will work with anyone who wants to work together to solve problems and get things done,” Whitmer spokesperson Bobby Leddy said in an email.

The plans come at a time when the state is trying to spend down $7 billion in surplus revenue and another $7 billion federal stimulus funds. The stimulus money, however, cannot be used to fund tax cuts under federal rules. 

The House tax cut would result in an estimated revenue loss of $2.4 billion in fiscal year 2023 and $1.7 billion the following year, according to an analysis from the House Fiscal Agency. In context, the state collected $31.4 billion in taxes and fees in fiscal year 2020, including $10 billion in income tax, according to the state’s comprehensive financial report.

Albert and Hall said they may look into budget cuts to cover the revenue gap but are confident their plan is sustainable.

“Where there’s a will, there’s a way,” Albert told reporters. “We have so many options on the table. …We are not operating at 100 percent efficiency, so yes, there are areas in the budget that we can comfortably (cut).

“There’s a lot of options on the table,” Albert said. “Nobody’s going to believe that we can’t find the money.”

Neither Albert nor Hall, though, named areas of the state budget they feel could be cut.

Opponents say the price tag of the House bill is too high.

“These costs will require the state to either cut public services we all rely on or risk losing vital federal aid provided under the American Rescue Plan Act, dollars intended to help struggling workers, families and businesses recover from the economic impacts of the pandemic,” Rossman said in a statement on behalf of the Michigan League of Public Policy.

In comparison, the Senate plan would cost roughly $2 billion a year. Whitmer’s plan to phase out the pension tax would cost the state $13 million in the current fiscal year and an annual $495 million by fiscal year 2025. Increasing the Earned Income Tax Credit would result in a dip of $262 million in revenue each year. 

Hall said he introduced his own plan because the other proposals benefit certain groups of people instead of all Michiganders.

“We saw corporate benefits, we saw certain people benefit. Select few, but not everyone,” he told reporters.

House Republicans’ plan includes the same individual income tax cut proposed by Senate Republicans — lowering the rate from 4.25 percent to 3.9 percent. 

Hall, who is sponsoring the legislation, cited the state’s economic standing Thursday as reason to return the tax rate back to 3.9 percent — before former Democratic Gov. Jennifer Granholm raised it to 4.35 percent in 2007 to close a $2 billion deficit. Granholm promised to bring the rate back to 3.9 percent within a few years, but her successor, Republican Rick Snyder, froze the rate at today’s 4.25 percent. 

“Now, we are sitting on more money than we ever had,” Hall said Thursday. “If we can’t bring it back to 3.9 now and give people tax relief, they are never going to do it.”

Hall’s proposal would also offer income tax relief to seniors 62 and older, expanding and increasing an exemption currently limited to those 67 and older. A working senior in Michigan would be able to deduct $20,000 from their taxable income, while a retiree would be allowed to deduct $40,000. Those numbers are doubled if senior citizens file jointly, which means a retired couple 62 years and older making $80,000 a year would collect all that income tax-free.

James Hohman, director of fiscal policy at the Mackinac Center, praised the House tax cut plan as a way to “make Michigan more competitive, encourage small business development, and … help the state attract more residents.”

Democratic lawmakers expressed concerns Thursday the plan would unfairly benefit richer taxpayers. Rep. Tenisha Yancey, D-Harper Woods, unsuccessfully tried to bring Whitmer’s proposals in front of the joint committee Thursday.

“How much do you think the top 1 percent are actually struggling?” Yancey asked Hall during the Thursday hearing, referring to the Michigan League of Public Policy study. “Is it equitable?”

Hall insisted his plan helps all Michiganders.

“People want relief, all people,” he said. “There are no gimmicks here.”

Despite the plan costing the state roughly $2 billion per year in revenue, Hall and Albert said they are not concerned about the long-term fiscal impact of their proposal and said it would be fully funded by the state’s own revenue.

Albert said he is willing to cut down the state’s spending to fund the tax cut, but did not specify in which areas he sees obsolete funding. 

Additionally, the joint committee on Thursday advanced a one-time spending package that would send $1.5 billion in state revenue to local pension funds and the state police retirement system. The goal, Albert said, is to make sure local governments have enough money to afford pension payments.

“Giving tax relief to our seniors does them no good if their pension that they earn runs out of money,” he said. 

Michigan Municipal League Executive Director Dan Gilmartin said the bill “would significantly improve the capacity of all Michigan communities moving forward.”

“Today marks a moment of great leadership and investment for the people of Michigan and the communities they call home,” Gilmartin said in a statement.