Income tax elimination plan brewing in Michigan Senate

Jonathan Oosting
Detroit News Lansing Bureau

Lansing — Republican state Sen. Jack Brandenburg said Friday he is preparing sweeping legislation to eliminate Michigan’s personal income tax, arguing a “game changer” is needed to help retain and draw new residents in the face of sluggish population growth.

The pending proposal is sure to meet resistance in Lansing, where GOP Gov. Rick Snyder has already raised budgetary concerns over the prospect of full income tax elimination. But it could provide a starting point for discussions of a rate rollback with the Republican-led state House.

Brandenburg argues scrapping the income tax would boost the state economy by giving residents more disposable income to spend at Michigan businesses. The second-term Harrison Township Republican plans to introduce legislation this month and convene a work group to consider tax policy options.

“I’ve heard a lot in the last six years that we are in the process of reinventing Michigan, and I’ve heard a lot about ‘relentless positive action,’ ” Brandenburg said, echoing Snyder’s signature catch phrase. “I can’t think of anything more positive than letting people keep more of their paycheck in their pocket.”

As part of his plan to scrap the state’s 4.25 percent personal income tax, Brandenburg told The Detroit News he may propose to increase the state’s 6 percent sales tax to offset some of the anticipated revenue loss from killing the income tax. He anticipates budget cuts would also be necessary.

“I do not know if we can do this without raising the sales tax, but if you have to do it, at least you get help from everybody that comes into this state and makes a purchase,” he said.

Raising the sales tax to offset income tax losses is similar to a “fair tax” concept that has long been popular in certain Republican circles, said Mitch Bean, former director of the House Fiscal Agency who now runs Great Lakes Economic Consulting. But he called the proposal “a joke.”

Raising sales taxes too high could propel residents who live near Michigan’s southern border to simply shop in other states, Bean said, and replacing the income tax with higher consumption taxes would provide a larger proportional benefit to the wealthy.

“People who don’t have a lot of money spend every dime they’ve got on something. People that have a lot of money don’t. So who ends up paying the most tax on this? People who don’t have a lot of money.”

Senate Minority Leader Jim Ananich, D-Flint, did not embrace the idea of eliminating the tax income but indicated he would back some sort of tax relief.

“After six years of tax increases, working families and seniors absolutely deserve a tax break from this administration,” Ananich said Friday.

Michigan collected more than $9.3 billion in personal income taxes in the 2016 fiscal year, according to the non-partisan Senate Fiscal Agency. It was the largest single source of revenue for the state.

Most income tax revenue goes toward the state’s general fund, which is used to pay for various government functions. Roughly 30 percent goes to the School Aid Fund for K-12 education.

Sales taxes generated about $7.3 billion last fiscal year, by comparison, with roughly 73 percent going to schools, 16 percent to the general fund and 10 percent to local units of government.

If you simply eliminate the income tax, “the issue is where do you get the money to run government?” Snyder told The News in a year-end interview. “Those are the challenges.”

Appetite for tax cuts

Six years after slashing business taxes but raising tax bills for many individuals by eliminating various exemptions, an increasingly conservative House GOP caucus appears to be primed to push for an income tax cut.

“It’s on the board, let’s put it that way,” said Rep. Tim Kelly, R-Saginaw Township, who chairs a policy committee that is developing a new House GOP agenda with input from new and old members. “It’s clearly a desire of a number of House Republicans to try and do something with it, but that’s nothing new either.”

Outright elimination of personal income taxes is “more of a holy grail, more of a moon shot type of thing,” Kelly said. He suggested that rolling the rate back to 3.9 percent “would be a good start.”

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 under Snyder.

Eliminating the personal income tax was among three ideas advocated in a Dec. 14 Detroit News commentary by Greg McNeilly, chairman of the Michigan Freedom Fund and a longtime Grand Rapids-based GOP strategist.

Personal income tax collections have climbed since the 2011 tax code rewrite approved by Snyder and the Republican-led Legislature, but major business tax collections have plummeted further than anticipated because companies can still cash in old tax credits.

Michigan Economic Growth Authority credits, offered under a program expanded by former Gov. Jennifer Granholm to keep automakers from leaving Michigan during the Great Recession, continue to limit state revenue and cause headaches for budget makers.

Michigan collected $929.8 million in corporate income taxes last year but paid out $893.3 million in business tax refunds, according to the Senate Fiscal Agency. Outstanding tax credits are projected to cost the state about $9 billion through 2032.

“When you’ve got $9 billion in liability hanging out over the next 20 years, it’s tough to reconcile anything as far as not only a rollback but an outright elimination of the income tax,” Kelly said. “Makes it pretty tough.”

Existing tax relief

Michigan residents already are slated for some income tax relief under a new road funding law that included offsets designed to minimize the effect of higher fuel taxes and registration fees that took effect this year.

The Homestead Property Tax is set to expand and increase in the 2018 tax year, saving qualified residents more than a combined $200 million a year. Beginning in 2023, the personal income tax rate could automatically decrease in any year that general fund revenue exceeds inflation.

The long-term automatic rate rollback plan could “strangle the state financially” if it takes effect as planned, said Bean, who questioned the continued GOP push to cut income tax rates.

“It’s the only game they’ve got, to cut taxes,” Bean said. “What about investing in things like infrastructure and education and public safety and things like that that have a real impact on communities?”

Seven state do not have an income tax, including Texas and Florida. Brandenburg wants to hear from officials in those states to learn about their experiences, and he is prepared to face opposition as he looks to make Michigan the eighth state without such a tax.

“I won’t be as bold as to say that we’ll have this done by the budget this year,” Brandenburg said. “This is going to have to be thoroughly looked into, thoroughly vetted out.”