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Snyder scolds House Republicans over tax cut action

Jonathan Oosting
Detroit News Lansing Bureau

Lansing — Michigan Gov. Rick Snyder scolded House Republicans on Wednesday, saying he was “disappointed” a legislative panel advanced a sweeping plan to cut and eventually eliminate Michigan’s $9.7 billion personal income tax after a single 90-minute hearing.

The proposal, approved by the House Tax Policy Committee in a 7-4 vote with two members abstaining, would reduce Michigan’s 4.25 percent personal income tax rate to 3.9 percent in 2018. It would then be rolled back by another tenth of a percentage point every year until it is eliminated by 2057.

Supporters argue the legislation could stimulate the Michigan economy, but the Republican governor reiterated he has “serious concerns” about the budget impact and urged a “longer and broader consideration” of possible consequences.

“This is an issue that requires thoughtful discussion with input from throughout the state,” Snyder said in a statement. “I hope the House will be more deliberate before taking a full vote.”

House Republicans are moving quickly on the tax cut plan with hopes it will be a serious part of budget negotiations for fiscal year 2018, a process Snyder and legislators both hope to wrap up by mid-June.

Michigan’s economy is on the mend and, after a series of tax code changes that primarily benefited businesses, individual taxpayers deserve a break, sponsoring Rep. Lee Chatfield, R-Levering, said Wednesday.

“I believe there is no better time than now that we as legislators give our constituents across the state meaningful tax reform where they can experience a homegrown economic boost the same way our state has over the past six years,” he said in committee testimony.

The legislation was put up for a committee vote after an hour and a half of testimony that featured praise from small-government and anti-tax advocates but criticism from groups concerned it would force steep cuts in public services.

The plan would save taxpayers an estimated $680 million during part of fiscal year 2018 — it would take effect in January but the budget year starts in October — and $1.1 billion for the full fiscal year 2019, according to a new analysis by the nonpartisan House Fiscal Agency.

The state would lose a combined $1.78 billion in revenue those first two years and then another roughly $400 million a year over the next four decades until the income tax was fully repealed.

The Snyder administration has not closed the door to negotiations but has warned the state already faces long-term budget pressures, including $2.1 billion in previously approved tax and fee cuts set to drain state coffers over the next three years.

“In some ways, talking about the merits of this bill is impossible without talking about the other side, which is what’s the offset?” Treasurer Nick Khouri said. “What revenues are going to be increased and how, or what spending is going to be reduced?”

Chatfield declined to identify potential spending cuts his bill could force, deferring questions to the House Appropriations Committee. But as a policy matter, he argued the income tax cut would stimulate economic activity, leading to more jobs and potentially more spending on taxable goods.

“I do not think we will be facing a budget hole once this is fully implemented,” Chatfield said.

Khouri disagreed.

“The idea that you can reduce the income tax rate from 4.25 to 3.9 and be revenue neutral because economic activity increases is just not true,” the state treasurer said.

Supporters argue that the income tax cut would honor a promise to taxpayers that was broken during a major tax code rewrite approved by Snyder and the Republican-led Legislature.

Michigan legislators and then-Gov. Jennifer Granholm, a Democrat, raised the income tax rate to 4.35 percent in 2007 as part of a last-minute budget deal. It was scheduled to roll back to 3.9 percent by 2015, but was frozen at 4.25 percent in 2011.

“This is a broken promise that was started by Jennifer Granholm and fulfilled by the Legislature and its current governor,” said Pete Lund, head of Americans for Prosperity-Michigan. “The promise was made this was going to be a temporary tax, and it wasn't.”

Committee members debated Wednesday who would benefit under the proposed income tax plan. Michigan has a flat income tax, meaning all residents would see their rates cut by the same percentage but wealthier residents would see a larger reduction in real dollars.

Chatfield told his colleagues the average Michigan household with two working adults could save around $200 a year under the legislation, “and I think when you measure that to the working man, this is something they will feel.”

State Rep. Martin Howrylak, R-Troy, said he supports the concept of a rate reduction but would also like to see the state provide targeted tax relief to low-income workers and seniors.

He suggested that raising Michigan's personal exemption — which allows residents to exempt the first $4,000 of their income from the state tax — would provide a much larger benefit to “folks living paycheck to paycheck.”

Howrylak did not vote on legislation in committee after fellow Republicans rejected his proposed amendment to begin rolling back the rate by a tenth of a percentage point in the first year, rather than immediately cutting it by 0.35 percentage points.

House Speaker Tom Leonard, R-DeWitt, has backed the 40-year income tax elimination plan, and House Appropriations Chairwoman Laura Cox is also on board.

“It absolutely has to happen during the budget process,” Cox, R-Livonia, told The News last week.

She called the 40-year phase-out “a really good, incremental tax cut that I think would kind of be an easier way for the budget to absorb it.”

General fund revenue is projected to grow roughly $232.6 million in 2018, meaning the $680 million tax break could leave a budget hole of $447.4 million that would only be partially offset by a one-time surplus of $330 million.

Officials expect general fund revenue to grow $67 million in fiscal year 2019, leaving the state with another $373 million shortfall that could require significant cuts to balance the annual budget.

Because the state law essentially holds the School Aid Fund harmless from decreases in the tax rate, the House Fiscal Agency said the “entire revenue reduction would be borne” by Michigan’s general fund.

The general fund, which is expected to total about $10.2 billion this year, is used to support a wide variety of government programs, including health and human services, prisons, state police and public universities.

The legislation would leave “a tremendous hole in our budget” without proposing any back fill, said Rep. Sheldon Neeley, D-Flint, who voted against the plan.