Michigan GOP to Democrats: Don’t mess with income tax rollback

• Income taxes would fall from 4.25 percent to about 4.05 if growth of tax revenues exceed inflation
• Republicans are urging Democrats not to repeal the 2015 law that created the potential rollback
• Whitmer proposes a narrower tax cut, but says she’s willing to negotiate with Republicans 

LANSING — Republicans are urging Democrats who now control the Michigan government not to repeal a 2015 law that could automatically reduce the state’s income tax rate as early as this year.

The law, signed by then-Gov. Rick Snyder in 2015 as part of a road funding deal, stipulated that Michigan’s 4.25 percent income tax rate would decrease to about 4.05 percent if the state's general fund grows faster than the rate of inflation in any year starting in 2023.

Nonpartisan House and Senate fiscal experts predict that an automatic income tax cut could happen this year, although state officials won’t know for sure if the law is triggered until books close on the current fiscal year this fall.

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Republicans, who supported an effort to lower the income tax last term that Democratic Gov. Gretchen Whitmer vetoed, argued residents deserve that money.

“A lot of hardworking families could use $500 today instead of five years from now,” Senate Minority Leader Aric Nesbitt, R-Lawton, said during a media event on Wednesday.

Michigan could have a surplus of about $9.2 billion by the end of this fiscal year, according to state Budget Office Director Chris Harkins. Officials estimated Friday the state collected about $33 billion in taxes in fiscal year 2022, a $1.5 billion increase from an earlier estimate in May. 

The surplus could ultimately run dry, however, and economists predict the state could be heading to a mild recession.

“We must commit that we will allow the people in Michigan to get this income tax cut,” said House Republican Leader Matt Hall, who lives in Kalamazoo County.

The tax cut trigger was designed to slow government growth and win over Republicans in exchange for their support to increase gas taxes and registration fees to boost road funding, although no one expected the unprecedented surplus that rose out of COVID-19.

The pandemic threw the state’s finances for a loop and resulted in an influx of billions of dollars into state coffers, in large part due to federal stimulus money and increased consumer spending. 

Whitmer’s administration has argued that lawmakers should revise the trigger given the unique circumstances of the pandemic and the possibility of future financial struggles. 

So far, legislative Democrats haven’t said whether a reversal or an adjustment of the 2015 law is on the table.  

Senate Appropriations Chair Sarah Anthony, D-Lansing, told Bridge Michigan last week she is waiting for “additional data” on the impact of the law. 

“We know that (the law) is there, we know we have to address it, and it’s just going to be a matter of how we do so,” she said. “This won’t be something we do in isolation. We’ll be working closely with our Republican colleagues to make sure we get something out there that’s responsible.” 

When asked by reporters if Republicans were willing to compromise, Hall said, “if we see the Democrats move in our direction and give immediate relief and a more simple plan … then that will lead to more negotiations.”

Whitmer’s administration has advocated for a targeted tax relief plan that would expand the Earned Income Tax Credit and eliminate the so-called pension tax for Michigan seniors.

Republicans and Democrats both submitted legislation last week to expand the credit that applies to lower-income families making less than $57,000 a year, averaging savings of about $2,467 in Michigan. 

Michigan has an Earned Income Tax Credit, but it was reduced to 6 percent of the federal version from 20 percent under Snyder. 

Restoring the credit to its original value would cost the state $262 million per year, while increasing state credit by about $350 to $500 for an average family of four, according to an analysis from the Whitmer administration.