By Allison R. Donahue, Michigan Advance
House and Senate Republicans have put forth a $2.5 billion plan to cut taxes, but analyses find that it will largely be the state’s richest residents who would be benefited the most.
With the midterm elections looming, tax cuts are shaping up to be a major fight this year between Democratic Gov. Gretchen Whitmer and the GOP-controlled Legislature.
In her Fiscal Year 2023 budget proposal, Whitmer also proposed a change to the state’s tax system, which includes $757 million in tax cuts, by boosting the Earned Income Tax Credit (EITC) and scrapping the state’s pension tax.
The EITC is a tax credit for workers and families with low incomes. In 2019, about 738,380 Michigan families benefited from the Michigan EITC, according to the nonpartisan Michigan League of Public Policy (MLPP).
Whitmer proposed increasing the EITC to 20% of the federal credit, which is estimated to give an estimated average of $499 in tax credit to eligible families, returning about $369 million to local economies. Currently the EITC is 6% of the federal credit, averaging about $150 for eligible families.
Both Whitmer and the Legislature are working on coming up with plans on how to spend the state’s $7 billion in federal pandemic relief funds and the higher-than-expected state revenue.
Earlier this month, House and Senate Republicans reached a compromise to cut the state’s income tax rate.
Senate Bill 768, sponsored by Sen. Aric Nesbitt (R-Lawton), would reduce the state’s individual income tax rate from 4.25 to 3.9%.
Unlike several other states, Michigan’s income tax is flat across all income levels.
Based on data from the Institute on Taxation and Economic Policy, a national non-profit, non-partisan think tank that works on state and federal tax policy issues, the MLPP found that reducing Michigan’s income tax rate to 3.9% would mean an average tax cut of $4,901 for the top 1% of Michigan earners, or those who earn at least $539,000 or more.
Those making less than that would see less of a return from the GOP’s tax cut proposal. According to the MLPP’s analysis of the data, the lowest 20 percent of earners, those making less than $23,000) would get an average tax cut of $12. And the state’s middle 20%, those who make between $41,000 and $70,000, would get a $92 tax cut on average.
The analysis also found that 69% of the tax cuts from the rate reduction will go to the wealthiest 20%, and only 31% of the benefits flow to the bottom 80% of Michigan workers. Many Michiganders with low incomes would see no benefit from a tax rate cut, including over half of Michigan residents earning less than $23,000.
According to the nonpartisan Senate Fiscal Agency, it would reduce revenue to the state’s General Fund and School Aid Fund by between $1.77 billion and $1.8 billion during Fiscal Year 2022 — the current budget year, which could necessitate cuts, as spending was already approved last fall. It would be a hit between $2.48 billion and $2.54 billion in Fiscal Year 2023 and between $2.5 billion and $2.6 billion in Fiscal Year 2024.
Both the House and Senate passed the bill and it’s on the governor’s desk. But Whitmer already made it clear she doesn’t support the legislation and plans to veto.
In a letter to lawmakers, Whitmer called the Republican-sponsored plan “fiscally irresponsible, unsustainable, and could increase costs for Michigan families at a time when they can least afford it.”
“It would mean drastically reducing resources to invest in important priorities like increased access to behavioral health, retaining police and firefighters, veterans, dams, removing lead service lines and so much more,” Whitmer added.
Senate Majority Leader Mike Shirkey (R-Clarklake) responded to her promise to veto.
“The governor’s veto threat is a slap in the face of Michigan residents struggling to fill their gas tanks and pay for groceries at a time of record inflation – inflation that is a direct result of her policies and those of President Biden,” said Shirkey. “If she does veto this bill, the governor will be making it clear that she thinks she knows how to spend Michigander’s money better than they do.”
Both Whitmer and Republican leaders agree on cutting the state’s tax on pensions.
The tax on pensions first went into effect in 2011 under then-Gov. Rick Snyder, a Republican. At the time, eliminating the pension tax was estimated to cost the state up to $93 million a year, according to the Pew Research Center.
Whitmer’s proposal would save about 500,000 retired households an average of $1,000 a year by exempting taxes on public pensions and restoring deductions for private retirement income.
