Lansing — House Democrats and Republicans sparred over budget priorities Wednesday as lawmakers held their first hearing on a package of bills that would use a chunk of the state’s nearly $1 billion projected surplus to provide a general income tax reduction.
Republicans on the House Tax Policy Committee said it is reasonable to send some of the money back to taxpayers, arguing that a drop in Michigan’s income tax rate would stimulate economic growth and and put the brakes on government expansion.
Democrats countered that roads and cities are crumbling after more than 10 years of state budget cuts and Gov. Rick Snyder’s $1.8 billion business tax reduction, yet the jobless rate of 8.4 percent remains fourth highest in the country.
The three House bills debated Wednesday would reduce the current 4.25 percent income tax rate to 4.05 percent by Jan. 1, 2016, and are the opening volley in an expected skirmish between GOP lawmakers and fellow Republican Snyder on how to use the surplus.
Snyder has proposed increased spending for K-12 education, colleges and other areas as well as an increase in the number of residents eligible for the homestead property tax credit. Targeted at low-income and moderate-income homeowners and renters, it would reduce state revenue $102.7 million a year, he estimates.
The proposed income tax cuts would reduce annual revenue by a growing amount, starting with about $100 million the first year it goes into effect.
Rep. Jeff Farrington, R-Utica, said the income tax cut legislation represents a strategy that is “best for all taxpayers” and includes “a long-term constraint on government spending.”
Farrington, the committee chairman and a bill sponsor, said he intends to advance the bills to the full House at next week’s committee meeting.
He was grilled by committee Democratic vice-chair Vicki Barnett of Farmington Hills, who argued that “massive state spending cuts” during a decade of declining state revenue have slashed crucial programs and noted the state needs to spend at least $1.2 billion more annually to keep its roads in shape.
“What other extra money do we actually have?” Barnett queried.
Snyder abandoned last year’s goal of hiking road spending $1.2 billion after it went nowhere in legislative negotiations. His 2015 budget plan calls for a one-time spending increase of more than $250 million to fix roads and bridges.
Farrington’s bill also would require continuing income tax rate reductions below 4.05 percent in years after 2016 when revenues in the state’s General Fund or main checkbook account increased more than $300 million and grew at a rate at least twice the inflation rate.
The provision, he said, “restrains excessive government growth during times of economic boom.” Farrington said the proposals strike a proper balance between what’s needed by government to pay for basic public services and what taxpayers deserve.
“I frankly see this as an economic development tool” that will “get more and more people to flock to Michigan to grow our businesses,” said Rep. Tim Kelly, R-Saginaw, another bill sponsor.
The discussion grew feistier as Democrats responded to Republicans.
“The more and more people you want to bring here are going to (find) worse and worse schools and communities teetering on the brink of bankruptcy,” Barnett said.
Rep. Jim Townsend, D-Royal Oak, said tax cuts targeted to middle-class and lower-income Michiganians would be more appropriate because they took the biggest hit from Snyder’s prior budget-balancing steps. The moves included cuts in the homestead exemption and the earned income tax credit — which is available to, among others, three-member families with incomes below $45,060.
The Republican bill sponsors argued that individuals in the higher-income brackets pay the highest taxes so it’s fair for them to receive bigger tax reductions.
The give-and-take ranged far and wide — from tax rates in other states and Hong Kong to California’s population trends and poverty in northern Indiana.
At one point, Farrington agreed with Barnett that a healthy funding increase for Michigan’s roads and bridges should be a top priority. While he said said he considers boosting road funding a higher priority than cutting income taxes, Farrington added that he believes the surplus is big enough to cover both.
The House bills are among three separate tax-cut proposals being circulated in the Legislature.
The biggest cut in state revenue — approaching $1 billion — would result from a bill sponsored by Sen. Jack Brandenberg, R-Harrison Township, to drop the income tax rate gradually to 3.9 percent by Jan. 1, 2017.
The third option, sponsored by Republican Sen. Dave Hildenbrand of Lowell, would boost the homestead credit by allowing it for homeowners with incomes up to $70,000 a year, rather than the current $41,000. A committee sent that bill to the full Senate on Wednesday.