The Snyder administration on Monday said it was proposing legislation to restore and gradually increase Michigan’s personal exemption for taxpayers in response to changes in federal tax law.
The Republican administration says legislation is needed because of Congress’ recent overhaul of federal tax law, which sets the federal personal exemption to zero while doubling the standard deduction. There was no initial vocal Democratic opposition to the proposed change, and GOP legislative leaders are open to the idea.
Gov. Rick Snyder has said the federal tax change will cause Michigan residents’ state income taxes to rise by $1.5 billion on average annually over the next couple of years if no action is taken by the Legislature to restore the $4,000 exemption.
“We’re increasing the exemption, so that the state does not receive more personal income revenue than we would have otherwise. In fact, we come out a little behind,” Lt. Gov. Brian Calley said in an interview.
The state Department of the Treasury estimated that 98 percent of the impact of the federal changes in Michigan are related to eliminating the federal personal exemptions. Other minor federal reforms — such as eliminating deductions for moving expenses — could result in increases for some taxpayers in some years and decreases in others.
“As opposed to trying to recreate those at the state level, we decided the best, simplest and fairest approach would be to increase that (exemption) to ensure that the state doesn’t receive any inadvertent increase in our personal income tax revenue because of a change at the federal level,” said Calley, a Republican running to succeed the term-limited Snyder.
To offset the additional effects, the legislation outlined by Calley would gradually increase the state exemption from $4,000 in 2018 to $4,500 in 2021. Under current law, it would increase from $4,000 to $4,300 to account for inflation over the same period.
Calley said this approach is more fair than reducing the tax rate, which would create “winners and losers” at the state level.
“We’ve done a lot of work to simplify our tax code since 2011. When we looked at how to address this, our approach was heavily weighted toward what’s the simplest way,” Calley said. “And the simplest way also was the best way because it doesn’t result in big tax shifts.”
Snyder and Calley worked with the state Department of Treasury over the holidays to analyze the federal changes, according to the governor’s office.
State Treasurer Nick Khouri told The News that, if no action is taken, the federal change could mean a collective state tax increase of $840 million in 2018 and $1.6 billion more in 2019.
That would mean an average increase of about $680 a year for a Michigan family of four, Khouri said.
The administration is sharing its plan ahead of this week’s Consensus Revenue Estimating Conference, where state government and economic experts estimate how much money the state has to spend during the upcoming budget year.
“We are putting Michigan families first, by working to enact a simple and fair solution to fix the unintended consequences of the federal tax plan,” Snyder said in a statement.
Calley said the administration is “very, very confident that this will be addressed.”
“I don’t know of any opposition at all,” he said.
Republican state House Speaker Tom Leonard of Dewitt and Senate Majority Leader Arlan Meekhof of West Olive have indicated they are willing to discuss state legislation in response to the federal overhaul.
“The last thing I want to see is taxes raised on the citizens of the state,” said Leonard, who had pushed a state-level personal income tax cut plan that was defeated in the House last year amid opposition from the Snyder administration.
Five Michigan Republicans in the U.S. House sent a letter to Snyder, Leonard and Meekhof last week saying they are willing to work with state legislators if they have questions addressing the federal tax code changes.
Led by Rep. Mike Bishop, R-Rochester, the lawmakers wrote that the Legislature exists to update state laws in response to “changing circumstances, and it has a duty to do so.”
“We have full confidence in the ability of the members of the Michigan House and Senate to review our state’s laws and make changes, as necessary, to ensure Michiganders can keep more of their hard-earned money,” Bishop wrote, joined by GOP Reps. Paul Mitchell of Dryden, Bill Huizenga of Zeeland, Tim Walberg of Tipton and Dave Trott of Birmingham.
Meekhof plans to discuss the impact of the federal tax code changes with Senate Republicans after they return from holiday break on Wednesday, spokeswoman Amber McCann said.
House Minority Leader Sam Singh, D-East Lansing, said Democrats will consider the short-term need to adjust the state tax code in light of what he called a “Republican fiasco” in Congress.
Democrats are more concerned about the long-term impact of the federal tax overhaul, Singh said, arguing it will primarily benefit corporations and wealthy individuals, much like state changes approved by Snyder in 2011.
“But yeah, we’ll help the governor fix the failed Republican congressional tax plan,” Singh told The News.
State Attorney General Bill Schuette, another candidate for governor, said Friday that Michigan should also adopt his plan to reduce the income tax rate from 4.25 percent to 3.9 percent.
Asked if he supports Schuette’s proposal, Calley said the exemption issue is the “most urgent.”
“We need to do this and remove the uncertainty as soon as possible,” Calley said. “If other people have other proposals to put on the table, we’re happy to consider those.”
Associated Press contributed.
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