LANSING — The Democratic-controlled Senate on Thursday muscled through a sweeping plan to cut taxes and boost Michigan’s primary business-attraction fund, passing legislation that Republicans opposed because of a provision that would stop a permanent reduction in the individual income tax.
The bill, which was passed 20-17 along party lines and is a top priority for Democratic Gov. Gretchen Whitmer, did not get immediate effect from Republicans, meaning it would not be effective until 2024. Because of how Democrats drafted the measure, that means a proposed $180-per-filing rebate would not occur, but it is more likely the projected income tax cut — from 4.25 percent to around 4.05 percent, due to revenue growing so much last fiscal year — would be triggered.
The Democratic majority held off on transmitting the legislation to Whitmer, in hopes that Republicans will OK the procedural vote next week, which appears unlikely without major revisions. Democrats also introduced a resolution that they could use to order immediate effect for the legislation without a recorded two-thirds vote — like in the House — a so-called “nuclear option,” according to the Republican minority.
The bill would:
- Largely phase out, by the 2026 tax year, a 2011 law under which many taxpayers cannot exempt retirement income until they turn 67. Certain government retirees, such as police and firefighters, would be treated like taxpayers born before 1946 and be able to fully deduct their pension income starting this tax year. About 500,000 households could eventually save on average $1,000 annually, according to Whitmer’s office.
- Quintuple the state Earned Income Tax Credit to 30 percent of the federal credit. It now is 6 percent after Republicans reduced it and established the “retirement tax” in 2011 as part of a plan that slashed business taxes. The move would help 700,000 lower-income households that on average would get $750 a year, up from $150.
- Earmark up to $500 million a year in corporate income tax revenue to the Strategic Outreach and Attraction Reserve Fund this budget year and also in the 2023-24 and 2024-25 fiscal years. The SOAR account is used to land large-scale business expansion projects, like Ford’s new electric vehicle battery plant in Marshall, and prepare build-ready sites for development. Until now, the governor and lawmakers have made three separate deposits totaling around $1.8 billion, but there are no ongoing funding sources. Up to $50 million annually would go to the Michigan Housing and Community Development Fund in perpetuity. A new Revitalization and Placemaking Fund would get up to $50 million a year through the 24-25 fiscal year.
“It’s not tax relief. It’s a tax hike. It won’t help family budgets. It will help the state’s budget," said Republican Sen. John Damoose of Harbor Springs.
Sen. Thomas Albert, a Lowell Republican, called it “a trap laying in wait for unexpecting taxpayers, a one-time rebate check today but income tax rates that are higher than they should be tomorrow and for years to come.”
Democratic Sen. Mallory McMorrow of Royal Oak accused Republicans of fighting for a tax cut she said would disproportionately benefit the wealthy and “give crumbs to those who need it the most.”
Sen. Jeff Irwin, an Ann Arbor Democrat, noted that the 2011 tax reduction for businesses was offset by raising taxes on retirees and scaling back the refundable credit for low-wage people.
“Now, 12 years later, Democrats are poised to repeal the Republican retirement tax and not just restore the Earned Income Tax Credit to where it was but to actually expand it further,” he said. “It’s going to provide on average $500 to $700 a year to low-income workers. That makes a difference for the people who are struggling right now. That’s why the relief is targeted in that way.”
Business groups have supported the expanded EITC, which Democrats call the “Working Families Tax Credit,” saying it would keep people in the workforce and give them more money to spend in the economy. Associations representing small businesses, however, have opposed the attempt to forestall the lower income tax, which many small business owners pay.
The state has an estimated $9.2 billion surplus, but Whitmer — who favors targeted tax relief — appears concerned about the fiscal sustainability of a broader, long-term tax cut.
The pension and EITC changes would lower revenues by an estimated $934 million annually by the 26-27 budget year, according to the nonpartisan Senate Fiscal Agency.
The $180 rebate checks are “contingent on Republicans choosing to vote for immediate effect,” said Senate Majority Leader Winnie Brinks, a Grand Rapids Democrat. Asked if the bill would only take effect immediately if Republicans get on board, Brinks said “at this point.”
On the possibility of changing the rules, she said: “If in the future we find that there are people who are getting in the way of doing things and working together well for the benefit of our state, we will consider action on that resolution.”
Senate Minority Leader Aric Nesbitt, a Porter Township Republican, called the tax measure “a sham” because of how it would stop the trigger and create “a permanent corporate welfare fund over the next few years.” He said there should be negotiations on it and warned Democrats to not “change the rules in the middle of the game.”
“That’s just wrong,” he said. “They’re trying to silence the voice of half the state.”
Whitmer, in a statement, said she was hopeful that Republicans will join with Democrats to “get it done” and provide the rebates.