House floats $1.7B tax cut, $1.5B grants for local pension funds

Beth LeBlanc
The Detroit News

Lansing — The Michigan House is moving a tax plan that would pair a retirement tax exemption hike and income tax reduction with cash infusions into municipal and state police retirement systems. 

Like a Senate-approved bill, the Republican-controlled House's tax plan would lower the personal income tax rate from 4.25% to 3.9%. 

The legislation also would allow an increased exemption level for all income for individuals over the age of 62, allowing a single filer's first $20,000 in income to be exempt and for joint filers, their first $40,000. The exemptions would increase to $40,000 and $80,000 after age 67, when combined with existing retirement income exemptions for that age group.

A separate appropriations bill would push about $1.5 billion toward underfunded pension programs across the state. 

Under the legislation, $900 million would go toward grants of up to $100 million for municipalities whose pension programs are funded at a rate below 60%. The grant program would require the retirement system to adopt best practices moving forward for the management of the system and would require the communities to put in its planned contribution.  

Another $250 million would adopt similar requirements and award grants to communities with a funded ratio above 60%. A last expenditure in the bill would deposit $350 million into the Michigan State Police retirement system. 

During a Thursday joint committee of Appropriations and Tax Policy hearing, Republican lawmakers promoted the bills as benefiting all taxpayers whereas other proposed plans have introduced targeted relief for certain income. But Democrats pushed back on the plan, calling it rushed and benefiting high income earners more.

"We can sit here and we can try to nuance this, OK, but I will tell you the people of Michigan do not believe us when we say we can't come up with $1.7 billion," said Rep. Matt Hall, the Marshall Republican who chairs the House Tax Policy Committee. He estimated the tax relief would save a family of four about $140 and seniors would "save much more."

Rep. Thomas Albert, chairman for the House Appropriations Committee, said shoring up public pension systems has been a priority for years and helps pensioners and taxpayers on the hook for those pension systems.

"There's not really any more responsible way that we could find to spend the surplus funds right now," said Albert, R-Lowell. "It not only ensures that our pensioners are going to get what they earned. It's also going to make sure our children and our grandchildren aren't the ones that are going to have to foot the bill."

Democratic lawmakers pushed back on the plan, arguing instead for a proposal by Gov. Gretchen Whitmer that was geared more toward public pensioners and low-income workers. 

"If we really want to help all of Michigan, we would repeal the pension tax completely and increase the earned income tax credit," said Rep. Tenisha Yancey, D-Harper Woods.

The pension plan is expected to cost the general fund about $1.5 billion while the income tax and retirement income exemptions are expected to cost about $1.7 billion in general fund revenue annually by the 2023-24 fiscal year.

The plan is the third proposed road map for how to return some of the state surplus back to taxpayers in an election year. The state is flush with billions of dollars, some of it one-time infusions of cash, due to an infusion of federal COVID relief over the past two years and increased state tax revenue. 

A Senate plan would decrease both the personal and corporate income tax rate as well as boost the exempt amounts for seniors born after 1945 from $20,000 to $30,000 for single filers and from $40,000 to $60,000 for joint filers. 

The Senate plan would constitute an about $2.5 billion tax cut. 

Whitmer's plan would increase the earned income tax credit and phase back in exemptions for public pensions from the 4.25% personal income tax. It also would "restore deductions for private retirement income," according a summary from the Democratic governor's office. 

Whitmer on Wednesday maintained she wants targeted tax relief for retirees and low-income workers. Her top two priorities, she said, are restoring tax policies on retirement income that were in place before sweeping changes were approved in 2011 and expanding the state’s Earned Income Tax Credit.

“I thought it was unfair at the time,” Whitmer said on Wednesday. “I have continued to do my part to try to give relief to those parts of our state that bore this burden. Now, we have an opportunity to make this right.”

Hall was questioned Thursday about how his tax cut would reckon with federal bans on using COVID relief funds for tax cuts. The ban is currently being challenged in other states and, so far, states have passed tax cuts if they can prove corresponding growth in state revenue.

Hall and Albert felt the state could justify the cut because of its tax revenue growth. Albert estimated the state had about $800 million in new continuing revenue in the general fund. 

"There is no money going back to the federal government because of this," Hall said, when asked about potential citations from the federal government.

A House Fiscal Agency analysis found the tax cut would leave the state about $1.8 billion short of the federal requirements to implement the tax cuts in fiscal year 2022-23 and $1.1 billion short in fiscal year 2023-24. Those shortfalls would have to be either returned to the federal government or cut from the state budget. 

If pulled from the state budget, the roughly $2.9 billion shortfall would have real impacts on communities and essential services the state provides, said Rep. Joe Tate, a Detroit Democrat and minority vice chairman for the House Appropriations Committee.

"We need to be a little bit more responsible and thoughtful with how were looking at appropriating these dollars or bills like this," Tate said. 

eleblanc@detroitnews.com

Staff Writer Craig Mauger contributed.