LANSING – Completion of the 2011-12 fiscal year budget took a major step forward Tuesday with an agreement in principle between Governor Rick Snyder and top legislative leaders on major tax changes, including a pension tax and the replacement of the Michigan Business Tax with a 6 percent corporate income tax.
With the handshake deal between Snyder, House Speaker Jase Bolger (R-Marshall) and Senate Majority Leader Randy Richardville (R-Monroe), Bolger and Richardville began the process of selling their Republican legislative colleagues on the plan to secure the necessary votes to pass it. The initial reaction from House and Senate Republicans was cautious on the pension tax proposal with signs the changes had failed to immediately win over skeptical legislators.
“These major improvements on the pension side I think are very thoughtful,” Snyder said at a news conference with Bolger, Richardville and Lt. Governor Brian Calley. “I think this is a great exercise in democracy. I’m proud of the plan we proposed. I believe this is good feedback from the two chambers.”
But Democrats and a host of organizations blasted the plan.
Throughout Snyder’s effort to win approval of his budget, he has described it as simple, fair and efficient. Debate will continue about whether the revised revenue proposal is fair and efficient, but few would argue the plan is less simple. For seniors whose mantra against Snyder’s original tax proposal has been to label it unfair, however, the change to the pension tax piece almost surely would be considered more fair.
Snyder’s original proposal would have raised $900 million by eliminating the generous exemption on pension income from private sector jobs from the income tax and making pension income from public sector jobs subject to the income tax for the first time. But the new proposal would raise just $300 million by not changing taxation of retirement income for those born before 1946 and instead moving toward eventually making all retirement income (other than Social Security and military pensions) taxable except for the first $20,000 – $40,000 for married couples.
The plan would raise $300 million instead of the $900 million Snyder’s original plan would have raised.
“In the long term, I think we’re structurally addressing the question of including pension income at higher levels,” Snyder said.
But while Snyder’s pension tax underwent significant revision, his proposed 6 percent corporate income tax to replace the MBT essentially emerged unscathed. Only C-corporations, those companies that sell stock, would have to pay the new corporate income tax. Other businesses, like LLCs, S-corporations and partnerships, would pay the regular personal income tax. The Senate had studied a variety of revisions to the tax.
“Overall, this is a significant tax cut,” Snyder said.
Calley said once enacted, the plan would make Michigan the 16th most competitive state for its tax climate in the nation according to the Tax Foundation.
To make up for the $600 million in lost revenue from the gradual implementation of the pension tax, the leaders agreed to make another $150 million in to-be-determined cuts, delay the scheduled 0.1 percentage point drop in the income tax to 4.25 percent a year until January 1, 2013 (saving $170 million), greatly reduce the number of people eligible to claim the Homestead Property Tax Credit on their income tax (saving more than $200 million) and make some technical changes totaling $60 million.
The changes to the Homestead credit would be huge.
Under current law, income tax filers with income under $73,650 can claim a credit toward their income tax equal to 60 percent of the amount by which the property taxes on the homestead, or the credit for rental of the homestead for the tax year, exceeds 3.5 percent of the claimant’s household income for that tax year. The maximum credit is $1,200. And the credit drops by 10 percent for each $1,000 in income the filer earns above $73,650, meaning those making more than $83,650 are ineligible. Those 65 and older and the disabled can claim a 100 percent credit instead of 60 percent.
Under the changes, the credit would begin phasing out once household income hits $41,000 with no credit for any households making more than $50,000. Snyder administration officials did not immediately have numbers for how many fewer taxpayers would be eligible for the credit.
Additionally, any taxpayer with household income of $20,000 or less, regardless of age, could claim a 100 percent credit. Those households, regardless of age, with income between $20,000 and $30,000 would see the credit phase down from 100 percent to 60 percent. Those with income between $30,001 and $50,000 would be at 60 percent.
“We made sure that going forward, we have low-income seniors protected,” Bolger said.
The plan maintains the slew of other income tax changes Mr. Snyder proposed, notably the repeal of the Earned Income Tax Credit.
There appeared to be continued discussion on what will happen as far as credits in the corporate income tax. At this point, the plan appears to be to go with Mr. Snyder’s proposal of having almost none of the credits in the MBT migrate to the new corporate income tax although businesses could choose to continue within the MBT to keep their credit. Richardville said there were still discussions on those credits, including the film credit, which Snyder proposes to substantially scale back and convert from a tax incentive to a grant.
“We’re still talking,” Richardville said.
The leaders had nothing to announce as far as the specifics of the cuts, but Mr. Bolger and Mr. Richardville said the additional $150 million would be reflected in the budgets reported this week by House and Senate Appropriations subcommittees.
If Bolger and Richardville succeed in winning the required votes to pass the plan, it would leave only the passage of budget bills to complete the 2011-12 spending plan. That’s a considerable task, but so far the Republican-led Legislature has not offered any major resistance to Snyder’s budget recommendation. The consternation had largely surrounded his pension tax plan.
Richardville acknowledged the lack of unanimous support in the Senate Republican caucus, but said the concern was more in wanting detail as opposed to the general direction.
“We have three-quarters of the caucus, give or take a quarter,” he quipped as to how much of the 26-member caucus supports the plan. “Before I’m going to have people sign up to a plan, they have to understand it.”
Bolger sounded more definitive that the House GOP was behind the plan.
“I wouldn’t be here today without my caucus,” he said. “My caucus encouraged me to go forward.”
But the early reaction from Republican legislators indicated no immediate embrace of the revised pension tax. Lawmakers didn’t dump on it either, but the high-level deal is no slam-dunk with the rank and file.
“It’s going to be difficult for me to support,” said Sen. Mike Green (R-Mayville). But he also said, “I’m not saying absolutely no to support a tax on pensions. I’m part of the caucus, and for every one of us, it’s going to be difficult because we’re not a caucus that wants to raise taxes.”
Rep. Pete Lund (R-Shelby Township) said it was too soon for him to commit one way or the other.
“It’s definitely a step in a better direction, but I’m still trying to evaluate the whole thing,” he said.
And Sen. Mike Kowall (R-White Lake Township) also was circumspect.
“I think it’s a work in progress. I think it’s got a little ways to go yet, but I have all the confidence in the world in them that they’ll come to some type of mutual agreement,” he said. “I’m listening to them. It’s starting to go in the right direction.”
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