Lansing — Economists are at odds over whether the new federal tax cut legislation approved and signed into law in late December will eliminate personal state income tax exemptions for Michigan residents as state officials review the issue.
Michigan Gov. Rick Snyder told Gongwer News Service and Associated Press last month that the repeal of the federal personal exemption would likely increase the amount of state income tax paid by some individuals in Michigan – an increase estimated at $170 a person in a household. The governor is an accountant.
Although the new tax law is complicated and ambiguous, Anderson Economic Group founder Patrick Anderson said he doesn’t think Michigan residents will lose state income tax exemptions in 2018.
Anderson, a deputy budget director for Republican Gov. John Engler, sent a letter to Michigan Treasurer Nick Khouri on Friday urging Michigan’s top financial official to quickly clarify what the new federal tax law means for state tax exemptions. He said in the letter the law does not eliminate federal or state exemptions.
“Some people are claiming that we just lost all our exemptions and we’re gonna be facing a $1.3 billion tax increase. I don’t think that’s the case,” Anderson said, who runs the consulting firm with headquarters in East Lansing.
“I’m hopeful that our elected officials in Michigan do the right thing and make sure either administratively or statutorily, they have clarified this with the appropriate firmness so that we can go on with our lives without worrying about a hidden billion dollar tax increase,” Anderson said.
The Treasury Department is analyzing the issue. A Snyder spokesman said there could be a decision by the end of the week.
But Jim Stansell, senior economist for the House Fiscal Agency, argues the new law does eliminate federal and state income tax exemptions because it sets the exemption to zero. The existing state law only provides exemptions based on the number of federal exemptions permitted, he said.
So if there are no federal exemptions, there are no state exemptions, Stansell said. Prior to the new tax law, the federal government offered a $4,050 personal income tax exemption and Michigan offered a $4,000 state exemption.
“It doesn’t repeal the language that establishes the personal exemption, it sets the personal exemption to zero. The effect is to make the personal exemption go away,” Stansell said.
If Stansell is correct, a single person could also see a $170 state income tax hike and a married couple with two children could have to pay an additional $680 after 2018. That could result in an extra $1.4 billion in tax revenue for Michigan.
“I don’t see a practical reason to put it on a federal return if you’re then gonna multiply by zero,” Stansell said.
Both economists said they could be mistaken.
Snyder previously told the Associated Press that “the federal tax reform is going to cause people’s Michigan taxes to go up,” and “we should figure out how to give that back to the hardworking taxpayers.”
Anderson said in his letter that “the new federal law … does not eliminate the federal exemption for individual filers,” but “sets the ‘exemption amount’ to zero for years 2018 through 2025, for the purposes of federal individual income taxes.”
The letter continued, “These exemptions remain in place because no change in state law has taken place, and because federal law continues to recognize and establish exemptions.”
Michigan taxpayers “will not be subjected to a large income tax hike due to a loss of their exemptions under state law,” according to the letter.
Anderson said his firm is planning on sending similar letters this week to treasury departments in Illinois and New York, which face similar questions.