Whitmer sells gas tax hike with targeted tax relief
Lansing — Gov. Gretchen Whitmer unveiled her first budget proposal on Tuesday, framing it as a “historic” opportunity for lawmakers to work with her on solving problems facing the state, including crumbling roads, an underperforming K-12 school system and drinking water systems facing contamination threats.
Among the key components of her plan presented to lawmakers, Whitmer proposed doubling the Earned Income Tax Credit for low- and middle-income workers to partially offset the impact of a proposed 45-cent-per-gallon fuel tax increase she wants to help “fix the damn roads.”
Whitmer also called for repealing the state’s so-called pension tax and proposed paying for it by taxing "pass-through" businesses at the same rate as an existing Corporate Income Tax they are exempt from.
The East Lansing Democrat unveiled the $60.2 billion plan for fiscal year 2020 — up 3.6 percent over the current year — during a joint meeting of the House and Senate appropriations committees.
"We can either continue down a path of disinvestment, ignoring festering problems … or we can choose a new path where we make the bold investments that solve the undeniable problems facing our state,” the governor told legislators.
The governor’s budget would chip away at a 2011 tax code rewrite under former Gov. Rick Snyder. Among other things, Snyder scaled back the Michigan Earned Income Tax Credit, phased out an income tax exemption for pensions and exempted S-corporations and other “pass through” businesses from a new 6 percent Corporate Income Tax rate.
The Michigan Earned Income Tax Credit is based on the federal version, which benefits working residents with low to moderate pay. For 2018, a family with one child could earn no more than $46,010 to qualify.
Michigan's credit is worth 6 percent of the federal credit, down from 20 percent prior to the 2011 revisions. Under Whitmer’s proposal, Michigan would match 10 percent of the federal credit in 2020 and 12 percent starting in 2021.
On Tuesday, Whitmer focused much of her attention on the state's roads as she cited studies that rated them as among the worst in the country and projected that they will continue to deteriorate despite a 2015 road funding law. She argued that failure to spend more now will only increase costs in the future.
“No one likes to raise taxes,” she said. “I know it’s hard, but the hard truth is we’ve got to get to work. Every day we don’t, we are jeopardizing our economic future, wasting our money and endangering our people.”
The presentation marks the start of formal negotiations with the Republican-led Legislature, a process that is expected to dominate the Lansing debate in coming months. Early reactions suggest Whitmer's gas tax proposal will be a tough sell.
Senate Majority Leader Mike Shirkey, R-Clarklake, told a Detroit radio station he expects the plan will be met with “rather strong opposition in both chambers,” and House Speaker Lee Chatfield, R-Levering, reiterated his stance Michigan must decouple gasoline purchases from the state’s 6 percent sales tax, which is not used to fund roads.
"The people of this state already said no to a reckless $2 billion tax hike not that long ago,” said Chatfield, referencing a 2015 ballot measure defeated by voters. “We can’t continue to gloss over the long-term structural problem while asking families, workers and seniors who are already living paycheck to paycheck to pay even more.”
Other Republicans made clear they would not vote for a 45-cent gas tax increase, noting at-pump taxes and auto insurance rates in Michigan already rank among the highest in the nation.
"At some point, we gotta ask ourselves are middle-class families going to be able to afford to drive a car in the state that is the motor capital of the world," said Sen. Tom Barrett, R-Potterville. "I think we're getting really that potential of where we make it unaffordable and punitive to drive a car in Michigan."
As The Detroit News reported Monday, Whitmer wants to increase the fuel tax in three phases, with 15-cent hikes in October 2019, April 2020 and October 2020. The total increase of 45 cents would generate more than $2 billion a year in new revenue to fix the state’s crumbling roads but likely give Michigan the highest fuel taxes in the country.
The gas tax hike would cost the average Michigan driver $23 a month, according to the Whitmer administration, but some low-income families could save $30 a month through expansion of the Earned Income Tax Credit and some seniors could save $65 a month from the pension tax repeal.
A pension bill introduced by Rep. Joe Bellino, R-Monroe, would revert to the retirement tax structure in place prior to 2011 by exempting public pensions from being taxed and implementing higher deductibles for state income taxes for other private retirement incomes.
Whitmer argued the average Michigan motorist is already paying more than $500 a year in car repairs because of damage caused by poor-quality roads.
"The average person in our state will feel relief when we do this and we do it right," she said.
But Republicans did not buy the argument.
"I think this budget overall taxes too much, spends too much and doesn't pay down enough debt," said Sen. Aric Nesbitt, R-Lawton, who made clear he would be a "no" vote on the gas tax proposal.
In tax year 2016, more than 770,000 Michigan residents claimed the state Earned Income Tax Credit, according to the Department of Treasury. The average claimant received a $148 credit for a collective total of $114 million.
The tax credit is a "bipartisan, pro-work policy and one of our greatest weapons against poverty," said Gilda Jacobs, a Democratic former state lawmaker who is president and CEO of the Michigan League for Public Policy. She called Whitmer's plan a "fantastic start" to restoring the match rate to 20 percent of the federal version.
Whitmer's budget also calls for $120 million for a new Drinking Water Protection and Innovation Initiative that would help communities fund lead pipe replacement, address PFAS "forever chemical" contamination and more. The governor also wants $60 million to replace drinking fountains in older schools with "hydration stations."
The Flint water crisis and PFAS contamination "undermines the story of Pure Michigan," Whitmer said, telling lawmakers her budget would help residents "have confidence in the water coming out of their taps."
As The News reported Monday, Whitmer is proposing a $507 million increase for K-12 school operations that will move Michigan toward a "weighted per-pupil funding system" that includes additional spending on special education and low-income students, according to an administration outline.
The additional spending would amount to the largest new classroom investment “in a generation,” said Budget Director Chris Kolb. While total spending increased under Snyder, a significant portion was devoted toward helping districts cover retirement costs.
Whitmer proposed $235 million to fund a base increase in per-pupil funding for K-12 schools, along with a $120 million bump for special education, $102 million more for at-risk students and a $50 million increase for career and technical education students.
The budget recognizes higher costs associated with educating some students, said Whitmer, who is also proposing funding to triple the number of state-funded literacy coaches in Michigan schools.
The additional K-12 spending would be possible because Whitmer's budget proposes fully funding universities out of the general fund, which would free up about $500 million in School Aid Fund revenue.
Whitmer argued the School Aid Fund "has been robbed" under previous administrations that used it to supplement higher education operations. Her plan calls for a 3 percent funding bump for universities and community colleges, the latter of which would still qualify for some School Aid dollars.
The governor also proposed $110 million in current-year spending to launch her planned Michigan Reconnect Program, which would provide free training for adults seeking an industry certification or associate's degree in an in-demand field.
Public school groups praised Whitmer's education budget, which would have a "game-changing impact in classrooms across Michigan," said Mark Greathead, Superintendent of Woodhaven-Brownstown Schools and vice president of the Tri-Counties Alliance.
"I’m even more excited for our students to see leadership in Lansing that is putting their success first and foremost. They deserve nothing less."