Gov. Rick Snyder proposed legislation Monday to offset what he said would amount to an unintended $1.5-billion annual tax increase for Michigan residents resulting from the recent federal tax reform package.
But as expected, an election-year proposal to adjust state income taxes was quickly drawing competing proposals from other state officials.
Snyder is proposing a restored $4,000 personal exemption for 2018 — increasing to $4,500 in 2021 — to offset the current $4,000 state exemption the administration believes will be lost as a result of the recent federal tax reform package signed into law by President Donald Trump.
The Free Press reported Jan. 2 that the recent federal tax reform was expected to result in an unexpected tax hike for Michigan residents of close to $1.5 billion. While significantly increasing the standard deduction, the package reduced federal tax exemptions to zero. Because federal exemptions are carried over to state tax return forms, legislation is needed to clarify Michigan's Income Tax Act so that exemptions at the state level can continue, Snyder said.
Snyder's plan will have to be approved by the Republican-controlled Michigan Legislature, which has had its own ideas about state income-tax cuts.
Snyder said he and Lt. Gov. Brian Calley worked with the state Department of Treasury over the holidays season to analyze the effects of the federal tax reform and come up with a state fix.
“We are putting Michigan families first by working to enact a simple and fair solution to fix the unintended consequences of the federal tax plan,” Snyder said in a news release.
“Everyone working together to limit income taxes on Michiganders is a great way to start 2018.”
Officials said Monday that under the federal plan, Michigan residents would pay an additional $840 million in state taxes in 2018 and more than $1.6 billion in additional taxes by 2019.
State officials said the federal changes would result in a $170 state tax hike for an individual and a $680 hike for a family of four — both of which would apply to income earned in 2018.
Increasing over time, the size of the exemption — which can be claimed for each taxpayer and each dependent —- will also offset other possible state tax increases resulting from the federal package, such as changes affecting moving expenses or pass-through income for small businesspeople, Calley said.
House Minority Leader Sam Singh, D-East Lansing, said Democrats warned that the Trump tax plan rushed through Congress would have unforeseen consequences.
“We have to ... protect Michiganders from this tax hike," Singh said.
"But we can't stop there," he said, adding it was time to counter changes made by Snyder and the Legislature in 2011 and "put more money in the pockets of working people instead of corporations.”
Under current law, the Michigan personal exemption was already set to increase to $4,300 in 2021, to account for inflation. Snyder's plan tacks on further stepped increases to hike the exemption to $4,500 in 2021.
"The intent is to leave taxpayers whole and to err on the side of giving them a little bit of a tax decrease," Calley told the Free Press.
Attorney General Bill Schuette, who, like Calley, is seeking the Republican nomination for governor, issued a campaign news release saying Michigan should "seize the opportunity" and reduce the state personal income-tax rate from 4.25% to 3.9%.
The Legislature approved what was to be a temporary hike in the state income tax rate from 3.9% to 4.35% in 2007, under Democratic Gov. Jennifer Granholm when the state was scrambling for revenues at the depths of the recession. It has since been reduced to 4.25%, but not to its former level.
"Let's cut taxes now, as Republicans did at the federal level, by working to finally eliminate the Granholm income tax increase," Schuette said in a news release.
Reducing the rate to 3.9% would amount to about a $900-million tax cut, but the benefits of it would be felt more by higher-income earners, Treasurer Nick Khouri said Monday.
Gilda Jacobs, president and CEO of the Michigan League for Public Policy, said a rollback of the state income-tax rate would disproportionately benefit the wealthy.
"Gov. Snyder's proposal to restore the state personal exemption is the right move and the fairest approach to benefit all taxpayers at all income levels equally," Jacobs said in a news release.
"This fix is needed quickly to provide Michigan taxpayers some clarity as they plan for the next tax year, and hopefully the Legislature will heed this urgency and embrace this equity."
Calley said further adjustments may be needed to counter what is expected to be a much smaller state tax windfall at the corporate level, resulting from the federal tax changes. Those adjustments will come later, as fixing the personal income-tax situation was more urgent, he said.
Last February, House Speaker Tom Leonard, R-DeWitt, backed a plan to cut the state's income tax rate from 4.25% to 3.9% over four years, only to see the measure — which Snyder and some Republicans opposed — fall short.
"Speaker Leonard and the governor first spoke about this proposal this morning, and experts in the House are reviewing it now," said Leonard spokesman Gideon D'Assandro. "We are going to put together the best plan for the taxpayers."
Snyder resisted efforts to roll back the income tax rate in 2017, noting the state continues to fact a tight budget, partly due to hundreds of millions of dollars a year in corporate tax credits issued in the 2000s and partly due to new pressures on the general fund created by a 2015 road funding package and a phase-out of the personal property tax on manufacturing equipment.
The state also cut corporate taxes by about $1.8 billion when it eliminated the Michigan Business Tax and replaced it with a 6% Corporate Income Tax, which only a minority of Michigan businesses are required to pay.
State Rep. Jim Tedder, R-Clarkston, chairman of the House Tax Policy Committee, said the restoration of the personal exemption is necessary to "preserve the status quo," but he is ready to explore "additional tax relief."
"Money always looks better in the pockets of the consumers and Michigan taxpayers," and further tax cuts will "continue to stimulate the economy," Tedder said.
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