Lansing — A new Republican proposal to cut state taxes by raising Michigan’s personal exemption could win bipartisan backing in the Legislature, where Democrats view it as a more equitable form of relief than an income tax rate cut.
State Sen. Jack Brandenburg, R-Harrison Township, on Thursday introduced legislation that would raise the personal exemption to $4,800 by 2021, up from GOP Gov. Rick Snyder’s proposal to raise the exemption in 2021 from $4,300 to $4,500.
Snyder and Lt. Gov. Brian Calley on Monday unveiled their “fix” to restore the state’s personal income tax exemption, which they say was effectively eliminated by the recent federal tax code overhaul. Without action, the administration says the federal change could cost Michigan taxpayers a collective $1.5 billion a year.
Brandenburg’s proposal would also restore the exemption but go beyond the $200 increase proposed by Snyder, which would cost the state about $50 million in revenue but save a family of four about $34 a year.
Snyder’s plan was “a good start,” Brandenburg said in announcing his proposal to hike the exemption $500 instead. Brandenburg chairs the Senate Finance Committee and has scheduled a hearing next week on the bill, which he said would “provide meaningful relief to taxpayers in our state, while being responsible with our state tax dollars.”
Brandenburg has previously pushed to gradually eliminate the state’s 4.25 percent personal income tax or reduce the rate to 3.9 percent. The House narrowly rejected an income tax cut last year amid opposition from Snyder, who warned the $1 billion plan could compound looming budget threats.
Brandenburg’s expanded exemption plan could cost the state about $150 million a year, said Senate Appropriations Chairman Dave Hildenbrand, R-Lowell, who called it a more feasible proposal.
“We’ve got to get all parties on board,” Hildenbrand said. “The governor expressed concern about the House plan, and the House couldn’t even pass that plan. This might be something more acceptable to all three parties.”
Most Democrats voted against last year’s House plan to cut the personal income tax but could rally behind a higher increase in the personal exemption, which they view as a less “regressive” form of tax relief.
“I’ve been an advocate of increasing the personal exemption for quite a long time,” said state Sen. Steve Bieda, D-Warren. “It’s an even tax break to a lot of individuals in this state, but in a sense it actually would benefit the lower-income people more proportionally” for someone making $20,000 a year, as opposed to $200,000.
Conceptually, a lot of Democrats may support the plan, Bieda said, but “we have to see how that impacts the budget, because we have certain obligations that we have to also make sure that we address.”
While legislators are again considering tax cut ideas, state officials on Thursday provided a sobering history of state tax revenues and looming budget pressures.
Experts from the state Treasury Department and legislative fiscal agencies made minor adjustments to protected tax revenues during a biannual consensus estimating conference that will be used to develop spending targets for the 2019 budget year.
Michigan ended the year with a surplus of about $280 million in its general fund, but legislators already spent about $53 million of it in a supplemental budget bill approved last month. House Speaker Tom Leonard, R-DeWitt, wants to put some of the extra money toward forgiving outstanding driver responsibility fees.
Total state budgets have grown under Snyder, but much of the increase is the result of federal funding for specific programs. The general fund, the state’s main source of discretionary spending, is expected to grow by 1.1 percent in 2018 and 0.3 percent in 2019 to $10.3 billion.
Annual general fund revenues are “meaningfully lower” than they were nearly two decades ago in 2000, said David Zin of the Senate Fiscal Agency. Adjusted for inflation, general fund revenues are less than they were in 1968, he told lawmakers.
“We have essentially no growth in discretionary revenues over the next couple of years, so any discussion of tax cuts needs to be combined with additional spending cuts or revenue increases in other places,” Treasurer Nick Khouri told reporters after the hearing. “Until we can have that broader discussion and identify those other areas, tax cuts right now are a difficult conversation.”
Budget Director Al Pscholka also noted more than $2 billion in spending commitments expected to hit the budget in coming years, including general fund money that will be dedicated to roads and pay for a phase-out of personal property taxes.
“If you look at the data, it’s pretty tight,” Pscholka said.
Still, many House and Senate Republicans are hoping the governor’s proposed tax fix will open the door for additional tax relief for Michigan residents.
A separate plan being developed in the House would combine the personal exemption restoration with some kind of reduction in the personal income tax rate.
“It’s not soup until it’s made, and we’re kind of working through the numbers. But there is definitely an appetite to give tax relief, and hopefully a little bit more than just the exemption,” said House Appropriations Chair Laura Cox, R-Livonia.
The Snyder administration wants to stay focused on continuing the personal exemption, Khouri said. He disputed claims by U.S. Rep. Paul Mitchell, R-Dryden, and other experts who contend the federal overhaul did not eliminate the state exemption.
“If there’s uncertainty, why leave it to this treasurer or any other treasurer to decide? Just address this statutorily and get rid of the uncertainty,” he said.
Economic recovery slowing
Michigan’s economic recovery has slowed down but is expected to continue through 2020, making it the longest sustained period of job growth in the state since World War II, economists told lawmakers Thursday.
“Moderation in the pace of job growth was bound to come at some time as the state’s job market got tighter,” said Gabe Ehrlich, director of the Research Seminar in Quantitative Economics at the University of Michigan.”
Ehrlich and fellow economists shared state and national data during the bi-annual Consensus Revenue Estimating Conference.
Michigan added roughly 44,000 jobs in 2017, which was the lowest annual rate since the start of the recovery that began in late 2009, according to Ehrlich.
“But in our view, it was still very tangible progress towards a stronger state job market,” he said.
Nationally, economic confidence jumped at the end of 2017 and remains high, said economist Daniil Manaenkov. Wage growth has been “unspectacular” but could increase as the job market tightens and employers offer higher wages to fill open positions.
“Consumers remain confident about what’s going on, and business are also fairly optimistic,” he told lawmakers.
The recently enacted federal tax overhaul, which “sharply” lowers corporate tax cuts and cuts personal income tax rates “modestly” through 2026, will benefit the economy but growth rates are still expected to taper off in coming years, Manaenkov said.
Manufacturing growth slowed as light vehicle sales dipped from 17.5 million units in 2016 to 17.2 million in 2017, with Detroit automakers’ share dropping from 42.7 percent to 42 percent.
University of Michigan economists are projecting flat auto sales of between 17.3 and 17.1 million units over the next three years, but they’re also predicting overall job growth in the state.
“Michigan’s economy has diversified over the last 20 years and that should make it easier for the state to add jobs even without employment growth in the manufacturing sector,” Ehrlich said.
While job growth is expected to slow in Michigan, Ehrlich said sluggish personal income growth rates should increase, from 2.8 percent in 2017 to 4.7 percent this year.
The state’s economic recovery was initially marked by the return of some jobs lost during the Great Recession, “but we expect the star of the show moving forward to be rising incomes, and that should be a welcome development for Michigan residents.”