The Republican-led Legislature on Thursday gave final approval to a veto-destined bill that would cut Michigan’s income tax, expand tax exemptions for older people and largely restore a per-child tax credit that was eliminated a decade ago.
Gov. Gretchen Whitmer, a Democrat seeking reelection, said the $2.5 billion package of tax cuts is “unsustainable” and would lead to spending cuts while the next budget is negotiated in coming months. She has proposed more targeted tax cuts and breaks for retirees and lower-income workers as the state runs a $7 billion surplus.
The legislation would cut the personal income tax to 3.9% from 4.25%, lower the age for filers to exempt up to $20,000 individually or $40,000 jointly to 62 from 67, allow an additional exemption for retirement income not covered by the standard senior deduction and create a $500 per-child tax credit.
Senate Republicans, who sent the bill to the governor on a party-line 22-15 vote, said tax cuts should be broad and significant because everyone is facing high inflation. The sponsor, Sen. Aric Nesbitt of Lawton, said a family of four making $50,000 would save about $1,200 a year under the plan. Seniors and businesses known as S corporations through which income flows to owners also would benefit, he said.
“It’s best to provide tax relief to all working families, all seniors instead of trying to pick winners and losers like what she’s trying to do,” he said.
Democrats said reducing the flat income tax would benefit the wealthy more than those who make less. They pointed to legislative fiscal analyses that project lost tax revenue may need to be offset with budget cuts to avoid putting Michigan at risk of losing billions of dollars in federal pandemic funding.
In a letter to legislative leaders requesting that talks begin, Whitmer said she has “serious concerns” with the measure.
“In its current form, this bill is fiscally irresponsible, unsustainable and could increase costs for Michigan families at a time when they can least afford it,” she wrote, later adding: “While I will not support legislation that forces cuts to schools, road repairs and public safety, I am encouraged that the House and Senate agree in principle that putting money back in the pockets of Michigan’s retirees and working families is a priority.”
The bill would reduce revenue by nearly $1.4 billion this fiscal year, nearly $2.8 billion next year and $2.5 billion in 2023-24 — largely in the $13 billion annual general fund.
The governor has proposed restoring Michigan’s earned income tax credit to 20% of the federal credit, up from 6%, and gradually repealing a 2011 change that reduced an exemption for retirement income for people born after 1945.
Whitmer says those qualifying for the earned income tax credit would get an additional $300 while retirees would save more than $1,000 under the plan that would cut revenue by roughly $750 million annually by the 2025 tax year.
A broad coalition that includes advocates for the poor, several major business groups and other organizations supports expanding the EITC to put money into the pockets of low- and moderate-income residents and help address a workforce shortage.
Nesbitt did not rule out the proposal but also said it is not a “No. 1 priority,” saying people gain much more from the federal credit than the state credit. The credits are refundable, meaning recipients get a refund if they exceed their tax liability.
“It’s important to provide tax relief for people that pay taxes and especially families that do,” he said.