LANSING — The push for election-year tax cuts gained further momentum today as lawmakers advanced a $1.7 billion proposal crafted by House Republicans to reduce Michigan’s individual income tax rate and raise income exemptions for retirees.
The House Tax Policy Committee passed legislation on a party line vote this morning that would lower Michigan’s individual income tax rate from 4.25 percent to 3.9 percent, the same reduction included in a GOP-backed bill that the state Senate passed last week.
House Bill 5838 also would lower the eligibility age from 67 to 62 to get an exemption on the first $20,000 of all income for individuals, and $40,000 for couples who file a joint tax return. Individuals and couples would get a second exemption of the same amount for retirement income generated through public or private pensions or disbursements from their IRAs or 401(k)s, making the first $40,000 of income for eligible individuals and $80,000 for couples tax-free.
The main sponsor behind H.B. 5838 — Rep. Matt Hall, R-Marshall — said the legislation offers tax relief for everyone at a time when inflation is running at a 40-year high and the state has billions available in budget surpluses and one-time federal pandemic-relief funding.
“Given the inflation that’s going on in our country right now, all Michigan families, workers and seniors need relief,” Hall said. “This is a bolder plan than anyone has presented so far and it will really give our seniors and our retirees the relief they need during these difficult times.”
A $2.5 billion tax-cut proposal passed last week by Senate Republicans also would reduce the state income tax from 4.25 percent to 3.9 percent, plus cut the state’s corporate income tax from 6 percent to 3.9 percent. Senate Bill 768 also would allow individuals 67 and older to take a $30,000 deduction on their annual state tax returns on all types of income, or $60,000 for a joint return, with the amount adjusted annually for inflation beginning in 2023.
Gov. Gretchen Whitmer’s proposed budget for the 2023 fiscal year that begins Oct. 1 would increase the state’s earned income tax credit from 6 percent to 20 percent of the federal credit, providing nearly $3,000 in tax relief to an estimated 750,000 households.
The governor also wants to repeal the state’s “retirement tax” on public pensions over four years and restore deductions on private retirement income such as IRAs and 401(k)s, generating more than $1,000 in annual tax savings for 500,000 households.
The tax cut proposals come after the state recorded a $2.69 billion budget surplus for the 2021 fiscal year that ended Sept. 30, and as estimates forecast a $1.44 billion surplus in the present 2022 fiscal year. The state has billions more in one-time money from federal pandemic relief and infrastructure funding.
Given the surpluses, “people don’t believe that we can’t come up with the money to give some of our seniors, families and workers a little bit of relief right now,” Hall said.
Moving the latest tax-cut proposal through the House Tax Policy Committee further positions Republicans as pushing for broader-based tax cuts as they negotiate a budget plan with Whitmer — who has called the Senate proposal unsustainable — for the state’s next fiscal year that begins Oct. 1.
Hall believes that possible tax cuts and budget discussions need to go together.
“You can’t cut taxes without working on the budget side,” he said.
Addressing pension debt
House Republicans today also rolled out a $1.5 billion proposal to use one-time money to support public pension plans. House Bill 5054, which passed the House Appropriations Committee today, would direct $900 million in grants for counties, cities, townships, villages and road commissions to use to shore up pension funds that are below 60-percent funded.
Another $350 million would go to the State Police Retirement System, and the bill would allocate $250 million for grants to municipalities that adopt certain best practices for their pension funds that are funded at 60 percent or more.
The Michigan Municipal League offered support for the legislation following the committee’s approval. H.B. 5054, sponsored by Rep. Thomas Albert, R-Grattan Township who chairs the committee, “would significantly improve the capacity of all Michigan communities moving forward,” Michigan Municipal League CEO and Executive Director Dan Gilmartin said in a statement.
“Today marks a moment of great leadership and investment for the people of Michigan and the communities they call home,” Gilmartin said. “The economic capacity and strength of our ‘main street’ communities is at the core of a vibrant Michigan. Thriving cities lead to strong regional economies and regional prosperity contributes to a healthy state economy. The action taken by the House Appropriations Committee today to pass HB 5054 strengthens the state at its very heart — our local communities.”