Senate Passes Income Tax “Fix” With Expansion

Jennifer Smith

By Jennifer Smith, MASB Director of Government Relations

DashBoard, Jan. 17, 2018

As we reported in News From the Capitol on Friday, major changes to the federal tax code were signed into law in Washington, D.C. that inadvertently raised taxes on Michigan taxpayers. Under the new law, the federal personal exemptions have been set at zero. Michigan taxpayers are currently able to take a $4,000 exemption on their income taxes for each federal exemption they claim. With the federal exemption set at zero, Michigan’s State Treasurer Nick Khouri believes Michigan taxpayers would no longer be able to claim an exemption on their Michigan income taxes.

Treasurer Khouri and Gov. Rick Snyder suggested a proposal that would be revenue neutral to the state, but allow taxpayers to continue to claim the exemption. However, the Legislature has proposed bills that uncouple Michigan’s personal exemptions from the federal exemption and then take it a step farther.

Senate Bill 748 was introduced last week and passed by the Senate Finance Committee on Tuesday. Under the bill, the personal exemption would be increased by $100 each year to $4,700 for the 2020 tax year. After that, the increase would be adjusted to the rate of inflation plus $700. It also allows for the interest and qualified withdrawals in an education savings plan to be deducted.

The Senate Fiscal Agency has stated that the additional exemption amounts in SB 748 will cost the state, at a minimum, $73.9 million in this fiscal year, increasing to $184.4 million in 2018-2019, and growing to $206 million in 2021-2022 and each subsequent year. The latest revenue estimating conference showed very little growth in the General Fund already; this increased loss in revenue could harm many programs in our state as the budget gets tighter and tighter.

Approximately 23.8% of the income tax revenues go to the School Aid Fund. This means the SAF revenues would decrease by approximately $49 million each year when the deduction increases are fully phased in. It stands to lose more than $17 million in this fiscal year.

The House will begin consideration of its proposal today in the House Committee on Tax Policy. House Bill 5420 will increase the personal exemption to $4,300 for 2018, $4,600 for 2019, and $4,800 for 2020 and each year after that. House Bill 5422 would allow a taxpayer who is at least 62 years old at the close of the tax year to claim an additional $100.

The House Fiscal Agency stated that the personal exemption proposal would cost $45 million in the current fiscal year, settling at $157.5 million when fully implemented in 2021. This would mean a reduction of approximately $11 million to the SAF this year, and $37.5 million beginning in 2021.

MASB opposes these proposals because of the cost to the state at a time when General Fund revenues are already facing pressures it may not be able to support. As we’ve seen in the past, when the General Fund is struggling, more costs, especially for higher education, are moved to the School Aid Fund.

Also, like all tax cuts, this can’t be considered in a vacuum. So far this session, the Legislature has passed six bills that make cuts to the SAF revenue streams, most of which the cost is indeterminate. The Governor did veto the largest cut of the six, SBs 94 and 95 (accelerating the sales tax on the difference exemption), but a possible override still looms.

We need to take a look at our tax policy as a whole to determine the proper rates and what should and should not be taxed. With each individual bill being added to the many other policies passed in recent years, revenue streams to the School Aid Fund continue to be eroded. Our schools will continue to see cuts if the School Aid Fund does not receive the revenue necessary to support our students and communities.  

MASB will continue to follow these proposals and the many others affecting tax policy currently under consideration in Lansing.

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