Schuette, Whitmer tax plans promise to strain Michigan's budget
Correction: A previous version of this article misstated projected household savings for a proposed income tax reduction.
Lansing — The leading candidates to be Michigan's next governor offer starkly different views of the role of state government, with one stressing the need for funding to solve problems while the other views taxes and regulations as an impediment to growth.
But both are pushing proposals that could pose challenges for keeping the state's budget balanced.
Attorney General Bill Schuette won the Republican gubernatorial primary with a relentless promise to cut the state’s personal income tax rate from 4.25 percent to 3.9 percent without specifying what other areas of the state budget he would cut.
The Midland Republican has signed a no-tax pledge, vowing to veto any tax increases sent to his desk, and recently indicated he wants to cut the amount of pension income exposed to taxation.
Whitmer has long vowed to eliminate the state's “pension tax," but has indicated she's open to raising gas taxes for road repairs. She has proposed other spending initiatives without clearly identifying a dedicated funding source.
The former Senate minority leader from East Lansing has called Schuette’s no-tax pledge “foolish,” and argued it's important to “invest in the things that improve all of our lives.”
Unlike the federal government, the Michigan Constitution requires a balanced budget each year, meaning that if elected and successful at implementing her or his policy agenda, Whitmer or Schuette would quickly be faced with the budget implications.
“It’s much easier to promise you’re going to cut taxes than it is to say what spending you’re going to cut,and it’s much easier to say you’re going to do a program than to specify what taxes you’re going to raise or what other program you’re going to cut," said Charles Ballard, an economics professor at Michigan State University,
"That’s a political reality in which both Schuette and Whitmer will find themselves.”
Cutting taxes pronto
Schuette wants to cut the income tax rate as fast as he can — “boom, take it to 3.9 percent,” he told The Detroit News — rather than phase in the reduction, as proposed in a 2017 state House plan that failed amid opposition from term-limited GOP Gov. Rick Snyder, who raised budget concerns.
“If we don’t cut taxes, we’ll be a smaller, shrinking state,” Schuette said. “I want Michigan to be a state people call home, not some vacation state.”
Because Michigan has a flat income tax, cutting the rates would mean larger dollar-per-dollar benefit for wealthy residents, Ballard said. A family with a taxable income of $1 million would save $3,500, while a family with a taxable income of $40,000 would save $140 a year..
Immediate implementation would also mean an immediate hit to the first state budget Schuette crafts. Non-partisan analysts projected the similar House tax cut plan would have reduced state revenue by more than $1 billion once fully implemented.
But Schuette argues the tax cut, combined with reduced business regulations, would stimulate economic growth.
“That will help our whole budget,” he said. As for spending cuts experts say would be unavoidable? “You know what, everyone is going to have to pitch in," Schuette said. "It’s a $58 billion budget.”
Michigan’s overall budget has grown under Snyder, but the $56.8 billion total for fiscal year 2019 is “a bit deceptive” because around 40 percent of incoming revenue is federal funding the state has little say over, said Mitch Bean, former head of the nonpartisan House Fiscal Agency.
The general fund, the state's main pot of discretionary money, totals around $10 billion, which is smaller than it was in 2000 when adjusted for inflation. Experts project the general fund revenue will grow by roughly $107 million in fiscal year 2020. Depending on how it is structured, Schuette's tax plan could cut up to 1 in every 10 dollars that flows into that fund.
“In order to do that, you have to get all sorts of cuts somewhere else,” Bean said. “To me its nonsensical, the idea of cutting $1 billion out of a budget that’s already below where it was 18 or 20 years ago.”
A tax promise
Schuette argues that cutting the tax rate is about keeping a promise to taxpayers. The increase to 4.35 percent that Granholm approved in 2007 was intended to be a temporary budget Band-Aid amid the Great Recession. Whitmer, then in the state Senate, was one of 12 Democrats who voted for the plan, along with four Republicans.
The rate was designed to roll back to 3.9 percent by 2015, but Snyder and the Republican-led Legislature froze the rate at 4.25 percent in 2011 as part of a tax code overhaul that lowered corporate taxes and exempted many small businesses.
“I guess there’s nothing more permanent than a temporary income tax,” Schuette said. “It was supposed to be repealed, and this is about honesty.”
Schuette’s proposed tax cut would provide an incentive to entrepreneurs who want to grow or start a small business, said Gary Wolfram, a conservative economist and director of the economics program at Hillsdale College. Many small firms are exempt from corporate taxes but their owners pay income taxes on profits.
“You drive through some little town in Michigan and some guy’s got an auto repair shop or something, it might make a difference in hiring another person,” Wolfram said.
Schuette’s tax proposal and no-tax pledge would also give businesses certainty, which is another key factor when owners are considering whether or not to expand, he said.
But Ballard warned that Schuette’s proposed tax cut proposal could “ultimately slow down our rate of economic growth depending on where the spending cuts happen.”
Training workers to fill high-demand jobs in the skilled trades takes money, he noted, and maintaining or improving expensive infrastructure is important to attracting job-creating businesses.
“The trend in Michigan for decades has been to cut taxes, and we’ve seen the results,” Ballard said. “We have some of the worst roads in the United States, and we’ve had huge cuts to higher education funding so that tuition has skyrocketed.”
Dinner table issues
Whitmer won the Democratic primary vowing to “fix the damn roads” and is open to raising gas taxes or registration fees to do so. If the Legislature is unwilling, she’d ask voters to approve bonding for what she’s described as a $3 billion state infrastructure bank.
Schuette said he’d like to spend more on roads as well but without raising taxes or fees, suggesting he’d find a way to dedicate more budget resources even as he pursues an income tax rate reduction experts say could strain the state budget.
“Whenever she says she wants to fix the roads, Gretchen Whitmer wants to raise your darned taxes,” Schuette said. “That’s her approach, and that’s her economic plan. Tax anything that moves.”
Whitmer called his comments “baloney," and said Schuette has been “spewing” similar claims over his 33-year career in politics.
“Anyone can offer positions and make empty promises to get elected, but I’ve got real plans to get things done that are paid for and will actually make a difference in people’s lives right now,” she said.
But many of Whitmer's own spending plans assume economic growth that is not guaranteed to materialize.
Whitmer has proposed a $100 million program to provide college scholarships or skilled trades training opportunities to qualifying residents, which she says could boost the economy. Beyond that, Whitmer said she'd write a budget that “prioritizes the dinner table issues that matter most to real people."
Whitmer is also pushing to eliminate the so-called pension tax on retirement income by restoring an exemption that was eliminated by Snyder and the GOP-led Legislature in 2011. Schuette said this month he’d also kill the pension tax.
Doing so could reduce state revenue by about $280 million a year, said Jim Stansell, senior economist for the nonpartisan House Fiscal Agency. But that number will “start to get bigger fairly quickly” because more people are now reaching retirement age who will be subject to the tax, he said.
Whitmer points to unexpectedly high state tax collections and contends projected growth would “more than pay my proposal to eliminate the retirement tax,” allowing retirees to keep more of what they earn to pay for things like gas, groceries and prescription drugs.
She also wants to boost K-12 education by ending the use of School Aid Fund money to fund state universities instead of general fund dollars, a practice that began under Granholm and continued under Snyder. Universities are set to receive a combined $900 million in general fund revenue next year.
The Whitmer campaign acknowledges reversing that trend without blowing a big hole in the general fund budget “could take time.” Beyond growth, her campaign said she would find ways to cut "waste, fraud and abuse” in state contracting, pointing to recent issues with privatized service providers.
Relying on economic growth to pay for programs "is a very Republican argument," said former state treasurer Al Pscholka, a Republican who suggested the plans of both Whitmer and Schuette could cause fiscal problems. "So is saying we're going to find waste and fraud and abuse," he said. "I'm just wondering why we haven't found it before."
Whitmer's Democratic primary rivals said they’d like to replace Michigan’s flat income tax with a graduated version that would require higher earners to pay higher rates. That would require a constitutional amendment, which Whitmer said she would not push for as governor.
“Right now stability in the overall tax code is more conducive for economic growth,” she said. “While there’s no doubt that working families and seniors are paying a higher share of state taxes under Lansing Republicans, I want to focus on the things we can get done right now to make taxes more fair for working families.”