(Source: MIRS.news, Published 02/09/2023) Gov. Gretchen Whitmer's tax cut proposal moved out of a joint House-Senate conference committee Wednesday afternoon but stalled on the House floor Wednesday evening after the Democratic majority was unable to get the 56 votes needed to pass it. The House plans to return to session at 10 a.m. Thursday.
Since the conference report is on a House bill, HB 4001, the Senate needs to wait until the House passes it before taking it up.
Republicans have refused to support the measure because it moves enough money out of the General Fund to deactivate the income tax rollback trigger. After internal grumbling Tuesday, nearly all of the Democratic caucus agreed to hold their noses and vote for it.
However, after MIRS witnessed a terse conversation between House Majority Floor Leader Abraham Aiyash (D-Hamtramck) and Rep. Dylan Wegela (D-Garden City) on the floor, Wegela confirmed that he would not be a yes vote on the legislation as is.
Wegela said he's fully in support of the portions of the legislation that increase the Earned Income Tax Credit and expand the amount of retirement income that can be exempted from taxation, as he co-sponsored and voted yes on the passage of prior House bills that deal with those issues.
Wegela's issue is with the $500 million appropriation into the Strategic Outreach and Attraction Reserve (SOAR) fund for the next three fiscal years through FY 2025.
The investment is part of an income tax appropriation that includes up to $1.2 billion to the General Fund, $50 million to the housing and community development fund and $50 million to a newly-created revitalization and placemaking fund.
Wegela said he views the SOAR appropriation as a corporate handout, and said there are other areas of the budget, like clean drinking water, infrastructure and school funding, that deserve the funds.
He said right now it's a “race to the bottom” to spend big and attract corporations to Michigan, but factors other than funding also play a role.
Talent, for example, is attracted to a state when they have clean drinking water, Wegela said.
Wegela's strident opposition on principle was reminiscent of former Sen. Patrick Colbeck, another principled legislator, albeit a Republican, who caused fits for the Senate majority caucus when he refused to plug his nose and support a larger caucus priority in exchange for the advancement of some other priority.
Looking ahead to Thursday, Rep. Veronica A. Paiz (D-Harper Woods) wasn't on the floor for today's session, however she was in the gallery and therefore able to vote. House Speaker Joe Tate (D-Detroit)'s office has confirmed that Paiz has been diagnosed with COVID-19. Meanwhile, on the GOP side, Reps. William Bruck (R-Erie) and Robert Bezotte (R-Howell) weren't present.
House Minority Leader Matt Hall (R-Kalamazoo) said the decision to bring Paiz in as a COVID positive member was wrong.
“I didn't say anything about this last week,” Hall said about Rep. Natalie Price (D-Berkley)'s decision to vote from the gallery, which he said had the potential to compromise the health of House members.
Democratic Communications Director Amber McCann said the caucus is putting forth its best effort to ensure Paiz has the ability to vote on a bill she's passionate about in a safe manner, which includes providing advanced notice and social distancing. Lawmakers are encouraged, but not mandated, to follow CDC guidelines, unlike state employees, McCann said.
She added that the Speaker would never compel a member to vote while COVID positive. During an unrelated phone call with a MIRS reporter on Monday, Paiz disclosed that her husband had tested positive and she was in the process of testing, as well.
On HB 4001, Hall said the bill or “any bill that repeals the income tax cut trigger" would receive no votes from the Republican caucus.
Following the announcement that the House would be adjourning without passage, Tate said the pause is less about member disagreement and more about giving them time to “digest” what's in the bill.
He said there would not be a return to conference committee or any further changes made to the bill.
“This will be it,” Tate said, adding that the EITC and “retirement tax” portions of the bill mirror Republican bill introductions and stated priorities. “I was encouraged to see what the Republicans introduced.”
Outside of increasing retirement income exemptions and increasing the EITC to 30% of the federal amount, the bill shifts $800 million in corporate income tax revenue away from the General Fund to a new fund created for the $180 rebate checks slated to be returned to taxpayers in Fiscal Year 2022.
A fiscal analysis attached to the conference report on HB 4001 confirmed that the earmark will reduce General Fund revenue enough to stop the trigger of the 2015 income tax rollback from 4.25% to 4.05%.
Before heading to the House, the bill passed out of conference committee on a party-line, 4-2 vote. It comes after some agitated House Democrats questioned the sense of passing $90 checks to a married person just to avoid the income tax reduction. They argue that the amount, when compared with the Governor's $500 rebate proposal from 2022, isn't worth the trouble.
McCann said the important thing is that taxpayers are receiving inflation relief, and many married filers will also qualify for a Working Families Tax Credit. She added that the rebates are structured for filers in the state, and the current setup is the best way to deliver this money.
Outside of Wegela, MIRS learned Tuesday that several other House Democrats were having heartburn about the tax cut deal, which spurred a special visit from Gov. Gretchen WHITMER into the Democratic caucus room today. She emerged smiling amid a standing ovation at around 2 p.m., telling MIRS she felt confident there were 56 votes to pass the conference report.
"A lot of energy in that room. It's good. It's nice to be in a bigger room with Democrats."
Asked if the number one critique she heard was over the $180 rebate check, which had been a concern relayed to MIRS on Tuesday, Whitmer responded with: "We just had a member who called in to say how enthusiastic she was about it, so I thought that was a good thing."
During the committee hearing, Sen. Dan Lauwers (R-Brockway) (R-Brockway) criticized the content of the conference report, saying it went beyond addressing differences between the two legislative bodies on the degree to which retiree income is taxed.
The expanded retirement exemptions that anchors HB 4001 will track closely with the version that previously passed the House. The bill allows retirees to receive their private or public pensions without paying state taxes on it through a four-year phase-in starting in 2023.
The tax-free exemptions would not apply to 457 plans, elective contributions to 401(k)s and 403b plans and early distributions from retirement plans.
Starting in tax year 2023, retirees could write off 25% of this retirement plan income. In the tax year 2024, they could write off 50%. In the tax year 2025, 75% and by 2026, the whole 100%.
The plan also keeps the standard retiree income exemption created by Gov. Rick SNYDER in 2012 as a replacement for getting rid of tax-free pension disbursements. For some retirees, particularly those who continue to work, the Snyder-era option may continue to make sense for them.
According to the House Fiscal Agency (HFA) analysis, the phase-in exemption would cost the General Fund $58 million in FY' 2022-23, $233 million in FY' 2023-24, $408 million in FY 2024-25 and approximately $515 million in FY 2025-26, with an expected reduction increase over time as more new retirees become eligible.
The School Aid Fund will not be affected, according to fiscal analysis, because the report includes an increase in the percentage of income tax dollars that are earmarked for the fund. The percentage would increase each year to offset the phase-in exemption, with 23.882% in FY' 2023-24, 24.071% in FY' 2024-25, 24.306% in FY 2025-26 and 24.471% in FY 2026-27 and beyond.
More details were also available on Whitmer's two other proposals introduced on Monday, including her “Working Families Tax Credit,” which would increase the state Earned Income Tax Credit (EITC) from the current 6% of the federal credit to 30%.
Similar to Rep. Nate Shannon (D-Sterling Heights)'s HB 4002, which was amended earlier this month, the tax credit increase will be retroactive to 2022.
The increase will cost the state $385 million per year, beginning in FY 2022-23, with a majority of the impact on the General Fund.
Whitmer's third piece of the puzzle, the $180 rebate checks that were first mentioned last Friday, will be available to “each eligible taxpayer” for the 2022 tax year.
The rebate program would go hand-in-hand with the creation of a Michigan Taxpayer Rebate Fund, which could receive money from any source at the discretion of the state treasury. Money in the fund at the end of the fiscal year would then lapse into the General Fund.
If the bill takes effect before April 18, 2023, the fund will be used to issue $180 rebates to taxpayers, $90 rebates to those married and filing individually and two $90 rebates to those married and filing jointly. The rebate would be an “advance refund payment of a refundable credit against tax liability for the 2023 tax year” in the form of direct deposit or check, according to bill language.
The cost to distribute taxpayer rebate checks will cost approximately $925,000, including mailing and processing returns and the potential for two additional full-time staff positions.
For FY 2021-22, the funding for the program will come from a redistribution of $800 million in corporate income tax revenue, which was a new addition to the House bill.
According to fiscal analysis, the shift is expected to reduce General Fund revenue by $800 million in FY '22, up to $600 million in FY '23 and FY '24 and up to $50 million yearly beginning with FY' 2025-26.
Following the bill's passage in the House, Republican Press Secretary Jeremiah WARD said the addition of an appropriation to a policy bill is inconsistent with Whitmer's vetoes in the past and her statements condemning referendum-proof legislation.
Rep. Andrew Beeler (R-Port Huron) called the bill a “smoke and mirrors proposal” to distract Michiganders “as she puts permanent income tax relief on the chopping block.”
“Michiganders need relief now and ongoing savings in the future," he said. "One-time checks are a poor excuse for levying a tax hike on working families and local businesses while creating a huge, unaccountable corporate slush fund. The people of Michigan should see through Gov. Whitmer’s attempt to offer them a temporary bribe to cover up a disastrous tax hike.”
Without Republican support in the Senate, which is likely to take up the bill tomorrow, Democrats won't have the votes necessary to give the bill immediate effect.
Without immediate effect, the bill would be stripped of a retroactive Earned Income Tax Credit increase, $180 rebate checks would not be sent out and the 2015 law rolling back the income tax rate to 4.05% would be triggered.
In the House, Rep. Greg VanWoerkom (R-Norton Shores), who vice-chairs the House Tax Policy Committee, said Republicans overall are in opposition to the re-distribution of $800 million in corporate income tax revenue, “basically to prevent what was already statutorily in law,” he said.
“This is immediate relief for every taxpayer,” VanWoerkom said, “so we see this as beneficial to all Michiganders, not just a select few.”
When asked what it would take to get Republicans on board, he said the cost would be an amendment to reduce the income tax rate to 4.05%.
“I think it would get a lot of Republicans in support,” he said.
When asked about a scenario where Democrats can't get immediate effect, Senate Majority Floor Leader Sam Singh (D-East Lansing) said it would be a shame for Republicans to try and stop immediate relief to families over political games.
“They're not having serious conversations,” he said. “They're looking out for a small group of millionaires and billionaires and trying to get them a tax cut.”
