Michigan tax cut: Deal could emerge next week. It’s messy. What to know
- Michigan Democrats continue tax cut negotiations behind closed doors
- Tax reductions for seniors, lower-income families could benefit 1 million Michiganders but cost state $1 billion annually
- State surplus could lead to income tax cut. Republicans fear Democrats could block it from taking effect
LANSING — Michigan lawmakers are continuing negotiations to cut taxes for seniors and lower-income workers, but a deal likely won’t come this week.
A panel of six Senate and House lawmakers will hash out final details of the tax cut package. But Amber McCann, spokesperson for House Speaker Joe Tate, D-Detroit, told Bridge Michigan late Wednesday the panel will not meet Thursday and the House will not vote.
The ongoing negotiations — almost entirely behind closed doors — come after the Senate and House quickly passed different plans last week to expand the state’s Earned Income Tax Credit for lower-income families and to repeal the state’s so-called retirement tax on seniors.
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About 1 million residents would benefit from the tax cuts, which are top priorities for Democratic Gov. Gretchen Whitmer and Democratic lawmakers, who now hold a two-seat majority in the House and Senate.
Little is publicly known about the tax cut discussions. What further complicates things is a 2015 state law set to take effect that could lower the state’s income tax further for all residents.
Here’s what we know so far (take a deep breath):
Proposed tax changes
There are two main tax cuts under consideration: Reversing the 4.25 percent income tax on pensions and other retirement incomes that was established in 2011 and an expansion of the state’s Earned Income Tax Credit that returns a few hundred dollars per year to some families.
What’s different: Senate Democrats passed a bill to exempt public pensions — pensions from federal, state and local governments — and other types of income such as 401(k) contributions starting next year.
The House plan would have phased it out in four years. But Democrats on Wednesday gutted the bill and sent it to the conference committee, which is likely to come up with a final plan.
Likewise, there are different plans floating around about the Earned Income Tax Credit, which was reduced to 6 percent of the federal version in 2011. The credit is for families that make below $57,414 per year and generally saves them a total of about $2,500.
The Senate wants to increase Michigan’s credit to 30 percent beginning tax year 2023, which means eligible taxpayers wouldn’t see changes on their tax returns until 2024, while the House would restore it to 20 percent and apply it retroactively to tax year 2022.
Savings: $400 to $600 per year for the tax credits for about 700,000 people, and about $1,000 per year for 500,000 seniors for the pension tax changes.
Cost to Michigan: About $1 billion per year in lost tax revenues (at least $442 million for the Senate’s version of the tax credit and another $500 million from the pension tax.)
Is that a lot of money? The state can probably afford it. It collected $35.8 billion in taxes in fiscal year 2021 and has a $9 billion surplus, thanks to federal stimulus payments to the state and residents, which boosted spending and tax revenues.
What about an income tax cut?
It gets more complicated.
Amid the talk of tax cuts is a looming trigger that could lower income taxes for everyone in Michigan, regardless of income.
Under a 2015 law, the state must lower its personal income tax rate permanently if general fund revenue exceeds a certain limit. If budget projections hold, the tax rate could drop to 4.05 percent from 4.25 percent, according to state officials.
What’s that mean?
Someone with a taxable income of $50,000 would see annual state taxes drop from $2,125 to $2,025. The potential cost to the state would top $800 million, House Appropriations Chair Angela Witmer, D-Delta Township, said last week.
What do both sides say?
Republicans want the income tax cut, saying it’s more equitable. Democrats have been tight-lipped about whether they will let the 2015 law take effect.
Crain’s Detroit reported, using unnamed sources, a plan by the Whitmer administration to avoid triggering the income tax by depositing $800 million into the state’s economic incentive fund for the last fiscal year, with an annual $500 million contribution to the fund for the next three years.
At a Tuesday media conference, Whitmer and legislative leaders did not rule out the possibility of transferring tax revenue to the fund.
Republicans said they are concerned Democrats will do just that, which GOP lawmakers said could circumvent a legislative process needed to appropriate money to the fund.
A spokesperson for House Democrats, Amber McCann, wouldn’t say whether Democrats are considering such a plan, but blasted Republican comments as “assumptions made by some people to use as a messaging point.”
“I understand that it’s more convenient to talk about those assumptions than it is to explain voting against tax relief,” she said.
Are Democrats and Republicans getting along otherwise?
Democrats took control of both chambers of the Legislature in January for the first time in nearly 40 years, pledging collaboration with Republicans.
GOP lawmakers say they have been shut out of the process, with House Minority Leader Matt Hall, R-Richland Township, accusing Democratic leaders of “one-party rule” and saying Whitmer is using “shady shell games … (to advance a) secret spending bill.
McCann, the Democratic spokesperson, said the “criticism is disingenuous.”
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