Michigan House OKs $2.5B tax plan with income tax cut, senior exemptions, child tax credit

Lansing — The Michigan House on Tuesday approved a roughly $2.5 billion plan to reduce taxes, including cuts to the personal income tax rate, tax exemptions for seniors and a $500 child tax credit. 

The plan combines aspects of proposals advanced by Republicans in the House and Senate, as well as a separate spending bill that would push about $1.5 billion to supplement underfunded government pension plans. 

The tax bill passed 62-42 with the help of Democratic lawmakers after three Republicans voted against the legislation and the majority fell short of the 54 votes they needed to get the bill across the finish line.

In all, the tax plan cuts the personal income tax from 4.25% to 3.9%, or a total of $1.1 billion the first year the tax reduction is in place; expands tax exemptions for seniors, which is worth about $600 million annually; and provides a $500 tax credit per dependent child, worth about $750 million. 

"If we can’t do it now, when we’re looking at billions of dollars of surplus, then we’re never going to do it," said Rep. Matt Hall, the Marshall Republican who chairs the House Tax Policy Committee. 

The plan approved by the House Tuesday excludes a corporate income tax reduction, which was part of a Senate-approved tax cut plan.

Senate Majority Leader Mike Shirkey, R-Clarklake, applauded House Speaker Jason Wentworth and House Republicans for moving the bill through the chamber. 

"Senate Republicans are eager to send this bill to @GovWhitmer so we can get money back in the pockets of Michiganders facing record inflation ASAP!" Shirkey wrote on Twitter.

Whitmer's office in a Tuesday statement criticized the Legislature's tax plan while touting her plan to roll back some retirement taxes gradually and increase tax credits for low-income residents. Her office said it was "time to sit around the table to negotiate a bipartisan deal."

"The legislation that is making its way through the Legislature is unsustainable and would either result in tax hikes later on for Michiganders or would make some of the largest funding cuts to schools, roads and police protection for communities," said Bobby Leddy, a spokesman for Whitmer.

Democrats pushed for changes to the legislation, arguing it should include an increased Earned Income Tax Credit and a graduated income tax. They have argued the graduated tax plan, which higher rates for individuals earning more income, is fairer than the current flat tax rate. 

Rep. Yousef Rabhi, D-Ann Arbor, warned against the GOP plan, which he said would hamper the state's ability to respond to future recessions and usher in a "new decade of cataclysmic budget cuts."

"There is no more fiscally irresponsible thing to do than what is being proposed here today," Rabhi said. 

A separate bill allocating about $1.5 billion to local pension plans passed 71-33, with 16 Democrats voting in favor of the legislation. Unlike the tax cut legislation, the pension bill was not negotiated with the Senate. 

"Today we have the opportunity to do the right thing and put more resources into retirement systems, helping stabilize them for years to come," said Rep. Thomas Albert, the Lowell Republican who chairs the House Appropriations Committee. 

The bill would put about $900 million toward grants of up to $100 million for local communities with pension plans funded below 60% and $250 million for local communities with pension plans funded above 60%. Both grant programs would require the retirement system to adopt best practices moving forward for the management of the system and would require the communities to put in its planned contribution.  

A last expenditure in the bill would deposit $350 million into the Michigan State Police retirement system

The tax exemption for seniors would allow an increased exemption level for all income for individuals over the age of 62, letting a single filer's first $20,000 in income be exempt and for joint filers, their first $40,000. The exemptions would increase to $40,000 and $80,000 after age 67, when combined with existing retirement income exemptions for that age group.

Whitmer's tax plan, by contrast, would increase the Earned Income Tax Credit and phase back in exemptions for public pensions from the 4.25% personal income tax. It also would "restore deductions for private retirement income," according a summary from the Democratic governor's office. 

Lawmakers have been questioned about how the tax reductions and credits would conflict with bans on using federal COVID relief funds for tax cuts. The ban is currently being challenged in other states and, so far, states have passed tax cuts if they can prove a corresponding growth in state revenue.

"Rules are attached to the ARPA relief funding and the feds made crystal clear that ARPA funds are not intended to make tax cuts," said Rep. Rachel Hood, D-Grand Rapids.

So far states have largely gotten around the federal ban by justifying the total tax cut as falling within the growth of state tax revenue. Republican House leaders have estimated the state has about $800 million in new continuing revenue in the general fund, but the more than $2 billion in tax cuts proposed eclipses that growth. 

A House Fiscal Agency analysis found the House tax cut — before the Senate's $500 child tax credit was added — would leave the state about $1.8 billion short of the federal requirements to implement the tax cuts in fiscal year 2022-23 and $1.1 billion short in fiscal year 2023-24. Those shortfalls would have to be returned to the federal government or cut from Whitmer's proposed $74 billion budget. 

eleblanc@detroitnews.com

Staff Writer Craig Mauger contributed.