Michigan Senate sends tax relief plan to Gov. Whitmer without rebate checks

Lansing — Michigan taxpayers won’t be getting a rebate check from the state Treasury Department next month.

But they might get a slight reduction in state income tax deductions on payday in the coming months.

The Michigan Senate late Tuesday night sent a wide-ranging tax proposal that would increase tax deductions for retirement income and boost a tax credit for low-wage workers to Gov. Gretchen Whitmer's desk, while leaving a looming cut in the state's income tax rate on the horizon.

Whitmer, a Democrat who is expected to sign the bill, made tax relief for seniors a top agenda item for her second term, calling it "long overdue" relief for retirees whose pensions became subject to full taxation in 2012.

"We’ve been fighting to get this done for over a decade, and I am proud to have partners in the Legislature committed to delivering real relief," the governor said Wednesday in a statement.

The tax legislation originally included a plan to give out $180 rebate checks, totaling about $800 million, to circumvent an anticipated drop in the 4.25% personal income tax. A 2015 state law, which tied the income tax to revenues, is expected to soon decrease the rate to 4.05%.

However, for the rebates to be sent out to avoid the cut, the bill required the changes in state tax law to take effect by April 18.

Senate Democrats, who hold a 20-18 majority, failed on Tuesday to get the 26-vote supermajority support needed to have the bill take effect earlier. Without two-thirds backing for immediate effect, the measure takes effect in 2024, too late for the rebate checks.

"It's unfortunate those won't be going out," Senate Majority Leader Winnie Brinks, D-Grand Rapids, told reporters Tuesday night. "We were hoping we would be able to get Republican support for that. But unfortunately, they were unwilling to do so."

Democrats supported immediate effect on Tuesday, but Republicans opposed it.

As for the potential income tax cut, Brinks said the law would be followed.

"I think that is likely," Brinks said of a tax rate reduction, which will be cemented once the state's financial books for the 2022 fiscal year are closed and an official report is issued in March on the state's finances.

Republicans touted the looming income tax cut in their own statements.

"Today, Senate Republicans protected the automatic income tax rollback that is due to millions of Michigan residents who need permanently lowered taxes, not a one-time gimmick that disappears in one trip to the grocery store," Senate Minority Leader Aric Nesbitt, R-Porter Township, said.

Tuesday's move came after two months of debate in Lansing over how to provide financial relief to residents amid high inflation and how to make good on campaign promises about undoing tax changes from former Republican Gov. Rick Snyder's administration.

Democrats won control of the Michigan House and Senate for the first time in 40 years in November, and the tax bill is their first major piece of policy to reach Whitmer's desk.

More:Michigan Senate passes $1.3B spending bill with Ford battery plant subsidy

The legislation joins together top items from Whitmer's agenda for her second term: easing taxes on retirement income and increasing the Earned Income Tax Credit (EITC) from 6% to 30% of the federal credit, which largely benefits lower-income workers.

Combined, Democrats have described the measures as about $1 billion in tax relief.

The EITC boost would reduce individual income tax revenue by about $385 million per year, according to the House Fiscal Agency. Whitmer's administration has said the change will benefit 700,000 households.

The retirement tax overhaul would alter standards put in place in 2011 by Snyder and would generally be phased in over four years. By fiscal year 2026, the changes would save taxpayers about $515 million a year, primarily by allowing retirees to deduct larger amounts of their income, according to the House Fiscal Agency.

The proposal would eventually restore deduction limits that were in place for all retirees before the 2011 tax overhaul. Currently, only individuals who were born before 1946 get the higher limits. For the 2022 tax year, the higher deduction limits of private retirement income were capped at $56,961 for single filers and $113,922 for joint returns.

Another prong of the package would divert up to $600 million from corporate income tax revenue every year for the next three years if corporate income tax revenue exceeds $1.2 billion.

The diversion would push $50 million toward a housing and community development fund, $50 million to a revitalization and placemaking fund and $500 million toward the state’s business incentive program, the Strategic Outreach and Attraction Reserve (SOAR) fund.

Also Tuesday, the Michigan Senate passed a $1.3 billion spending bill that deposits another $170 million in the SOAR fund and allocates $630 million to prepare a rural tract of farmland in Calhoun County to secure a $3.5 billion Ford Motor Co. investment for a new electric vehicle battery plant.

Six Senate Republicans voted with the 20 Democrats to give that legislation immediate effect.

cmauger@detroitnews.com