Snyder faces tax fight with GOP peers in second term

Chad Livengood
Detroit News Lansing Bureau

Lansing — Gov. Rick Snyder starts his second term facing a tax fight as fellow legislative Republicans prepare to resurrect the 3.9 percent income tax rate their predecessors promised — and failed — to restore.

The initiative is taking on urgency because Snyder balanced the state budget in his first term in part by raising individual income tax bills through a sweeping elimination of loopholes and postponing a planned rate reduction. In May, the Republican governor will ask voters to approve a 17 percent increase in the state's sales tax rate to shore up a $1.2 billion deficit in road funding and boost education spending.

But Snyder's days of pushing for tax hikes could be numbered in the new Legislature as conservative Republicans target the current 4.25 percent income tax for a reduction.

"The promise to the people has to be honored," said Sen. Jack Brandenburg, R-Harrison Township, who plans to re-introduce the income tax cut this year. "When you look at the last four years, we hardly did anything for working-class families as far as tax relief."

Conservatives are putting the issue on their radar and may get stronger support this year because Republicans convene a new legislative session Jan. 14 with even larger House and Senate majorities than in the last term.

"I think there's a real appetite to do that," said Rep. Al Pscholka, R-Stevensville, the incoming House Appropriations Committee chairman.

Snyder, however, has not been so hungry for tax cuts because of uncertainty over how much the state will have to pay out for tax credits to businesses that were doled out by previous administrations.

"We could see some budget challenges over this next year, not because of the economy … but because of past practices," he said. "Those old tax credits … that's going to make it more difficult to simply do tax reductions."

In 2007, the Legislature raised the income tax from 3.9 percent to 4.35 percent to balance the state budget as Michigan's economy tanked. The rate was lowered to 4.25 percent in late 2012, but only after Snyder and the Legislature delayed that cut to balance the budget in 2011. But promises by lawmakers to fully scale back the temporary tax increase never materialized.

Conservative Republican lawmakers since have been pushing to restore the pre-recession 3.9 percent rate, which was the result of seven years of gradual reductions former Gov. John Engler set in motion in 1999.

"We cut it to 3.9 (percent) over seven years because the economy was booming and revenue was coming in and we didn't have to sacrifice some strategic decisions we wanted to make," said Ken Sikkema, who was the Republican House leader in the late 1990s. "I think that's the question and issue people have to grapple with (now) if they want to cut it back to 3.9 percent."

Agency warns of deficit

The Senate Fiscal Agency warned this week the state's budget this fiscal year may run a $162.2 million deficit because tax revenues are not meeting projections. If that deficit is confirmed by other state economists later this month, it could ease the fever some legislators have to cut taxes.

"I think people should work under that assumption that it could be very difficult (to cut taxes)," Snyder said Thursday. "First let's make sure we're being fiscally responsible."

Last spring, the Snyder administration used uncertain revenue estimates to get lawmakers to refrain from pursuing an election-year tax cut.

"The only reason it was more subdued for the last couple of years is, I think, frankly, we all understood we made significant changes in the tax code (in 2011) … and you need to let those take root," said former state Rep. John Walsh, a Livonia Republican who becomes the governor's strategy director on Monday.

Brandenburg's previous income tax proposal called for a gradual reduction to 3.9 percent over four years. The nonpartisan Senate Fiscal Agency estimated Brandenburg's tax cut would reduce general fund revenue by at least $835 million annually when fully implemented.

Brandenburg said the cost could be absorbed by cutting spending in state departments. "I don't think that would take too much effort," he said.

Pscholka said pursuing the tax cut in 2015 "depends on where we are in terms of our fiscal position."

Arlan Meekhof, the incoming Senate majority leader, also said the state's tax revenue outlook could play a factor in deciding whether to pursue an across-the-board tax cut this year.

"You can't do all of the things you want at warp speed," said Meekhof, R-West Olive.

Meekhof said he's optimistic the economy will continue to grow enough that lawmakers could justify lowering the tax rate again.

"If we do responsible budgeting … we'll find the savings that we need," he said. "I believe Michigan's glass is half full, and it will continue to rise."

Former state Rep. Vicki Barnett, who left office Wednesday, said incoming lawmakers would be "foolhardy to keep pursuing income tax cuts" without knowing the full effects of the $1.8 billion tax cut they gave businesses in 2011.

"When you have an absolutely booming economy operating on all cylinders, then maybe it makes sense (to cut taxes)," said Barnett, D-Farmington Hills. "But when you're struggling to educate kids, you can't keep your infrastructure operating well … and you're appointing emergency managers to run cities, clearly we're not running on all cylinders."

Mixed signals?

Sikkema, who is now a senior policy fellow at Public Sector Consultants in Lansing, said it doesn't make sense to cut the income tax at a time when Snyder and the Legislature are asking voters to increase the sales tax on May 5.

"You'd be foolish to give the impression that you have money sitting around while you've got this ballot campaign," Sikkema said. "I think you've got to put the tax cut discussions on the shelf until after May."

"You might need that revenue to fill on potholes after May," he added.

But Sen. Mike Kowall, the incoming GOP majority floor leader, said a reduction in the income tax could be used to entice voters to approve the sales tax increase.

"I think there's an opportunity here to open that window for discussion," said Kowall, R-White Lake Township. "It all depends (on) what the economy's going to do. As things get progressively better, we don't need to have a rate that high. We can start moving it down a little bit."

The senator acknowledged, though, that it could be difficult to get an income tax cut through the Legislature before July.

"Around here, nothing happens in six months," Kowall said. "Gestation of an elephant is 24 months."

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