Nessel: Expected income tax rate cut is temporary; Snyder calls it 'overreach'

Lansing — Attorney General Dana Nessel says an automatic income tax reduction written into a 2015 state law and likely to be triggered this month should only last one year, prompting criticism by Republicans including former Gov. Rick Snyder, who called Nessel's opinion "unreasonable overreach."

The House Fiscal Agency earlier this year estimated the state income tax rate will drop to 4.05%, saving taxpayers about $700 million a year. The 2015 law was designed to trigger a tax cut in the event that rising tax revenues exceeded a certain threshold.

In an advisory opinion, the Democratic attorney general said the Republican-authored law triggering a tax cut is not permanent relief for taxpayers.

"Simply put," Nessel responded in a five-page opinion, "the statute provides temporary relief based on temporary circumstances."

Nessel's legal opinion runs counter to that of the nonpartisan House Fiscal Agency and the Republican architects of the 2015 tax cut trigger.

But it supports a theory that's been floated in Lansing as Democratic Gov. Gretchen Whitmer preferred issuing $180 rebate checks, which would have circumvented a reduction in the individual income tax rate from 4.25% to 4.05%.

The opinion prompted a joint response from Republicans involved with the drafting and passage of the law in 2015: Snyder, former House Speaker Kevin Cotter, former Senate Majority Leader Arlan Meekhof and current Senate Republican Leader Aric Nesbitt. Snyder, Cotter, Meekhof and Nesbitt all agreed the policy was meant to be a permanent reduction.

Nesbitt argued the language "could not have been more clear" regarding the intent that the tax cut would be permanent.

"The attorney general’s opinion today is an unreasonable overreach of what was agreed upon," Snyder said in the statement. "Michigan taxpayers deserve the surplus dollars now and into the future.”

Nessel 'playing word games'

House Republican Leader Matt Hall, R-Richland Township, likewise slammed the opinion, arguing that Nessel and Whitmer had teamed up to avoid permanent tax relief. He noted Whitmer had tried at least once this year to avoid the trigger by attempting to move $800 million from last year's revenue forward to the current fiscal year to use for rebate checks.

"Playing word games with the law doesn’t change the law," Hall said in a statement. "Michigan taxpayers deserve lasting, real relief, not a temporary money mirage brought on by Democrats’ partisan tricks.”

Snyder added that the reduction, meant to activate in the event of a large government surplus, shouldn't be kept from taxpayers "when there are not critical expenses to pay for." The state's surplus sits at $7.3 billion.

But the attorney general's opinion, which lawmakers often use to guide their decision-making, concluded that a Republican-controlled Legislature "intended the relief to taxpayers to be only temporary."

Nessel's opinion on the matter came at the request of state Treasurer Rachael Eubanks, an appointee of Whitmer, who had requested Nessel give a legal interpretation of the duration of the tax rate reduction. Whitmer has said she would "follow the law."

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Democrats briefly considered another way to circumvent the income tax cut that would have involved diverting income tax revenue to a fund that subsidizes job creation by large corporations, but they abandoned that short-lived plan. Such a diversion of income tax revenue would have stopped an automatic income tax cut.

Senate Republicans blocked Whitmer's plan for issuing the proposed $180 rebate checks next month by refusing to allow a recent tax relief bill to go into effect immediately. Republicans have argued their maneuvers would provide longer-term tax relief and that the Democratic governor was attempting to sidestep or curtail the tax cut.

What 2015 law says

The question of the duration of a tax cut relates to a 2015 law that ties the income tax rate to tax revenues.

The 2015 law required the state to decrease the income tax rate if tax revenue increased at a rate that exceeded the rate of inflation. The law provided a formula to determine how much of a decrease should occur based on revenue.

The 2015 law left the determination of whether an income tax cut should be triggered up to the state treasurer, currently Eubanks, and the directors of the Senate and House fiscal agencies. The rate is expected to be hit this year thanks to higher-than-expected tax revenue that's left the state — when combined with federal COVID and infrastructure aid — with a $7.3 billion surplus.

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The Senate Fiscal Agency also estimated the trigger would be hit but stopped short of estimating the actual rate decrease, noting it would wait for books to close on the last fiscal year before doing so. Books are expected to close on Fiscal Year 2021-22 in the coming days.

The House Fiscal Agency told The Detroit News late last month that it was operating under the assumption that the rate cut is permanent. While the trigger calculation will be reevaluated each year for additional cuts, it will be starting from the most recent income tax rate, not the current 4.25% rate, said Jim Stansell, senior economist and associate director of the House Fiscal Agency.

But Nessel argued in her Thursday opinion that because the triggering event is "impermanent" so is the decreased rate it would cause.

"Because that situation is only temporary, it makes sense that, rather than provide a permanent tax reduction based on the (perhaps unusual) economic circumstances of a single fiscal year, the Legislature intended the relief to taxpayers to be only temporary as well," the attorney general wrote.

eleblanc@detroitnews.com