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Senate Wants $2B Tax Cut; House $1B As Chambers Prepare To Pass Budgets

May 3, 2022

Republicans have promised to deliver worthwhile tax relief in the age of ascending inflation and costly necessities, and GOP senators hope a $2 billion “tax cut” allowance will help them walk the talk. 

Both the House and Senate moved their respective Fiscal Year (FY) 2023 spending plans to their chamber floors this week. Next week, the expectation is the House will pass its budget and the Senate will pass its budget. Both sides will take until the Consensus Revenue Estimating Conference to extol the virtues of how they want to spend an unprecedented state budget surplus caused by COVID-19 relief money and higher-than-expected tax revenue.

On May 20, the Treasurer, Senate Fiscal Agency and House Fiscal Agency will agree on revenue projections. After that, discussions and negotiations will begin in earnest. With the Governor, Senate and House all on the ballot this year, it’s expected a budget compromise will be pounded out before the July 4 recess so everyone can campaign on the spending they were able to extract out of the negotiations.

The House left $1 billion on the balance sheet to talk about tax cuts, preferably the income tax. The Governor has consistently called for an expanded Earned Income Tax Credit (EITC) and retirement income exempted from the income tax. The Senate is leaving the door open on what the tax cut would look like.

“We have not specified what type of tax cut. There has been discussion both on income tax by the Governor and by the Senate and the House. But we’ve also had the discussion about a sales tax offer on gasoline as well,” said Senate Appropriations Chair Jim Stamas (R-Midland). “We’re making sure we’ve appropriated the dollars as a tax cut. If a tax cut doesn’t work out, then we have the opportunity to look at other investments.” 

On Tuesday, an amendment to a Senate subcommittee’s recommendation for the General Government attracted attention by dedicating $1 billion in one-time and $1 billion in ongoing funding to create a special tax-cut piggy bank.

Tax cut fever is being driven by high inflation rates. The mindset is that everything is costing more and the income of too many Michiganders isn’t keeping up.

Earlier this month, the U.S. Bureau of Labor Statistics reported that the inflation rate hit 8.5% for March – after already reaching an annual rate of 7.5% by early February, remaining the highest it’s been in 40 years. 

Nationally, the Bureau also reported that gas prices skyrocketed by 18.3% from February to the end of March, and the average rent for a two-bedroom home increased by 22% upon a year-over-year basis. 

Earlier this spring, GOP lawmakers sent out a $2.5 billion income tax cut – reducing Michigan’s income tax from 4.25% to 3.9% – and a six-month gas tax pause that would have subtracted around $725 million from road projects for the Fiscal Year (FY) of 2022. 

Each endeavor was slashed down by the Governor’s veto pen, with Gov. Gretchen Whitmer categorizing them as unsustainable. She specifically said the income tax minimization would “blow a recurring, multi-billion dollar hole in basic state government functions from public safety to potholes.”

Stamas told the media he looks forward to working with the Senate Majority Leader as he works with the Governor and the Speaker of the House “to figure out where we go.” 

“Hopefully, we are able to find something that helps put more dollars back into Michigan family’s pockets so they get to choose where they spend their dollars,” Stamas said. 

Democrats Eye More Funding For Talent

However, Sen. Curtis Hertel (D-East Lansing)– the minority vice chair of the Senate Appropriations Committee – said setting aside a huge amount of money for a not-yet-negotiated tax cut left many worthy spending proposals from the Governor on the cutting room floor. His argument is that investing in Michigan’s future will be vital in keeping the state economically competitive.

“We think that there are very important programs that help Michiganders that aren’t being looked at. I think the biggest thing that’s lacking is investment in talent,” Hertel said. “When you look across the budgets, there’s a dramatic reduction in funding for programs that help train Michiganders for the jobs of tomorrow, and in our shortage areas . . . we need new teachers in the state, we need more nurses, we need more engineers.” 

For example, the Senate budget recommendation for the Department of Labor and Economic Opportunity – which chopped gross funding by nearly 60% from the Governor’s recommendation – did not include the Governor’s recommendations for $230 million in one-time grant funding for universities to improve medical education, health sciences, and electric vehicle training, teaching and development.

Push Made For Larger EITC

However, with the present-day budget discussion revamping the search for ideal tax relief, a coalition of organizations advocating to expand Michigan’s EITC used the backdrop urge for the passage of SB 417. 

The legislation by Sen. Wayne A. Schmidt (R-Traverse City) would initiate a phase-in progression of the state’s EITC over a four-year period, eventually hitting a 30% match of the federal credit. 

“Nearly 6 in 10 Michigan jobs pay less than $47,000 a year and that isn’t enough to make ends meet for many families,” said Monique Stanton, the president of the Michigan League for Public Policy. “According to the 2020 census data, Michigan’s poverty rate is 14%, and it’s even higher for families with kids at 15%.” 

At a press conference hosted Thursday morning by the coalition, Stanton said raising the EITC would benefit approximately 750,000 residents in Michigan and nearly 1 billion children. 

“The EITC encourages work. It is explicitly designed to encourage greater participation in the workforce because it is only available to families that work, and at a time when many employers are having difficulty filling available jobs, the EITC has a proven track record of pulling people into the workforce,” said Veronica Horn, the president of the Saginaw County Chamber of Commerce. 

Horn said the bigger the credit for this type of tax relief: “the more money that’s spent locally.” 

“Expansion of the EITC shall serve as the cornerstone of the state’s economic recovery plan post-pandemic,” she said. 

The coalition also included the Ann Arbor and Ypsilanti Regional Chamber, the Detroit Regional Chamber, the Midland Business Alliance, the Grand Rapids Chamber of Commerce and other groups. 

Also, when it comes to the Senate budget recommendation and cuts, the bills have dropped the number of financed full-time equivalent (FTE) positions for various departments. 

For example, the Michigan Department of Corrections would have 20.7% less FTEs, the Michigan Department of Health and Human Services would have 9.7% less FTEs, the Department of Insurance and Financial Services would have 12.2% less and the Department of licensing and Regulatory Affairs would have 15.9% less.  Stamas explained the drop in unfunded FTEs would ultimately clean out unnecessary positions and widespread vacancies across the state. 

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