Our editorial: Make a realistic tax adjustment
Federal tax reform has brought with it an opportunity for Michigan residents to get a tax cut, but it's no sure thing and a fiscal drama is now playing out in Lansing. More money in the pockets of taxpayers is good for Michigan, but lawmakers must be wary of slashing revenues without equal cuts to the state’s budget.
State lawmakers have been working to address a problem that arose when the new federal tax law zeroed out personal exemptions in exchange for a higher standard deduction. The federal switch is meant to benefit most taxpayers and make the tax filing process easier.
But since Michigan’s tax code has been tied to the number of federal personal exemptions filed, the state needs to change the code to make up for the loss of personal exemptions, or else residents will lose $1.5 billion per year.
It’s a necessary fix, otherwise the federal reform will result in a tax hike for Michigan residents.
The Legislature, however, sees this as its rare opportunity to give taxpayers an even bigger cut. Last week the House approved a nearly $360 million tax cut plan that expands the state’s personal exemption for all filers by $500 by 2020. That chamber also added a new $100 tax credit for seniors.
The tax cuts were passed overwhelmingly in the GOP-controlled House in a 105-1 vote.
The Senate also approved a separate tax cut plan that would raise the exemption even more — to $5,000 by 2021, with an increase after that.
The Senate Fiscal Agency estimates that tax cut would decrease state revenues by $206 million per year starting in fiscal year 2022. It would decrease revenue by smaller amounts leading up to that.
Gov. Rick Snyder has supported a more modest cut to account for other impacts of tax reform, increasing the exemption from $4,300 to $4,500 by 2021. He’s cautioned lawmakers against making the cuts too big, arguing the fiscally sound course the state has been on will be for naught if it ends up with a deficit by the end of this decade.
That’s hard to argue with, particularly as the state’s most pressing challenges require significant revenue. Road and infrastructure funding, talent development and local government investment are all critical.
The governor called for significant increases in per-pupil K-12 student funding in last week’s State of the State address. He’s also going to seek another $175 million in road funding next year, in addition to $150 million in general fund revenue that must be dedicated according to a 2015 law.
Unless the Legislature is ready to make significant cuts to the state’s budget and cut programs, it should reconsider its zeal for tax cuts that don’t have matched savings elsewhere.
If lawmakers send Snyder legislation that goes too far in its tax slashing, the governor should veto it and work with the Legislature on a compromise.