LANSING, Mich. — After commanding the legislative agenda for six years, Republicans say now is the time to finally enact a major tax cut for Michigan residents.
The problem is it may be too late.
GOP lawmakers pushing to gradually repeal the 4.25 percent personal income tax will confront some stark realities — namely, future budget pressures created by the Legislature itself.
In a 2015 deal to raise fuel taxes and vehicle registration fees to address deteriorating roads, legislators approved two other key measures.
They partly offset the tax hikes with a sweetened income tax credit for some homeowners and renters starting in the 2018 tax year, which will cost $206 million annually to start. And to limit the size of the tax increases, the Legislature voted to permanently shift money normally spent on other services to road and bridge repairs starting in 2018. That will reduce the $10 billion-plus general fund — the state’s second-largest account behind school aid — by $150 million in year one, $325 million in year two and $600 million in following years.
In effect, while general fund tax revenues are projected to rise 2.7 percent this fiscal year and 2.3 percent in the next one due to modest economic growth, they will increase just 0.6 percent in 2018-19 because of the road-related policy measures, according to a Senate Fiscal Agency memo sent to senators on Thursday.
That alone could make it tougher to pass an income tax cut.
But the phase-out of what was seen as an onerous tax on manufacturing machinery and other business equipment — enacted in 2012 — started having a more significant effect on the budget this year, to the tune of $420 million. Also this year, the state must begin paying some of the cost of expanding Medicaid to 600,000 more low-income adults under the federal health care law. And the cost of Flint’s water crisis may keep rising.
Incoming state budget director Al Pscholka predicted a minimum $700 million squeeze in 2018-19 on the general fund, which predominantly helps fund social welfare programs, prisons and universities and is also used to draw additional dollars from the federal government. He declined to comment much about calls for tax relief, saying, “I know we’re looking forward to having that discussion with the Legislature.”
Two GOP-sponsored plans to make Michigan the eighth state with no income tax have been introduced in the new term. A Senate bill would eliminate it over five years. A House plan would gradually end the tax over 40 years.
Sen. Jack Brandenburg of Macomb County’s Harrison Township said he is frustrated that individual taxpayers have gotten no real tax cut from Republicans. As part of a broad business tax cut enacted when Snyder took office in 2011, the GOP-led Legislature raised individual taxes by scaling back exemptions or credits for pensioners, homeowners, low-income earners and parents.
Donald Trump’s victory in Michigan showed that people want “meaningful tax relief, not watered down,” Brandenburg said. He acknowledged that abolishing the income tax would “blow a $9 billion hole in the budget” but pledged to explore replacement revenues, starting with a review of taxation in seven states without an income tax.
The prospects for an outright repeal of the income tax seem slim. It is the state’s largest revenue source and accounts for nearly a third of $30 billion in total state revenue each year.
But Republicans’ early push could set the stage for talks on a smaller tax cut, perhaps by lowering the 4.25 percent income tax to 3.9 percent. The levy had increased in 2007 to help resolve a massive budget deficit and had been scheduled to gradually drop back to 3.9 percent until Gov. Rick Snyder and the GOP halted the cut under their business tax overhaul that was opposed by Democrats.
The Michigan League for Public Policy, which advocates for the poor, said even a 0.1 percentage point reduction in the income tax would reduce revenue by $250 million.
“The water we drink, the schools our kids attend, the roads we drive on and the police officers and firefighters we rely on all depend on state funding and Michigan should be investing in these services, not hobbling them with another misguided and ineffective giveaway that will largely benefit the rich without creating any jobs,” said President and CEO Gilda Jacobs.
House Democratic Leader Sam Singh of East Lansing said jettisoning the income tax is not feasible and called it “political theater.” The Republican governor, meanwhile, wants to see “concrete data” showing there would be enough money to ensure services for residents and spending on infrastructure, a spokeswoman said.
Top Republicans responsible for crafting the budget said they are open to a tax cut, however.
“What I like about reducing taxes when we have sort of a steady revenue stream is that is puts pressure on the spending decision-making. As you reduce taxes, you’re forced to prioritize your spending in a big $55 billion budget,” said Senate Appropriations Committee Chairman Dave Hildenbrand of Lowell.
He said tax cuts phased in over time are “a little bit of a leap of faith” because it is unknown if the economy will stay steady.
House Appropriations Committee Chairwoman Laura Cox of Livonia expressed concern with eliminating the income tax over five years but said doing so over four decades is manageable.
“I’m supportive of it at first blush because I think we owe that to the taxpayers,” she said.