LANSING – The most sweeping overhaul of state taxes in a generation overcame its most difficult obstacle Thursday when the Senate, despite great reluctance among several of members of the Republican majority, scrounged up the votes to pass the legislation. Two hours later, the House concurred in the Senate version of the bill, sending it to Governor Rick Snyder for his signature.

Final legislative approval of the replacement of the Michigan Business Tax with a 6 percent corporate income tax, the first-ever meaningful taxation of pensions and the elimination of most income and business tax credits and exemptions puts Snyder and the Legislature in good position to complete the 2011-12 fiscal year budget by Snyder’s May 31 deadline.

“Who would have thought that tax legislation of this sort could have gotten passed, let alone passed by May?” Snyder said at a Capitol news conference moments after the Legislature adjourned. “If you look at the legislation, it’s not perfect, but if you were trying to start a state, you said you were going to build a state and you had to put in a tax system that would be simple, fair and efficient, much of that was accomplished in this legislation.”

The vote is the biggest legislative victory yet for Snyder and certainly the most impressive, considering that he, with critical help from House Speaker Jase Bolger (R-Marshall) and Senate Majority Leader Randy Richardville (R-Monroe), persuaded deeply conservative Republican majorities to swallow the controversial pension tax. Coupling the pension tax and the elimination of popular income tax breaks like the child care credit with the replacement for the hated MBT proved key.

But it took some last-minute wheeling and dealing to secure the final votes. Senate officials said Snyder, Richardville and Sen. Mike Nofs (R-Battle Creek) struck an agreement to back a bill Nofs will introduce exempting police officers and fire fighters from the pension tax, Nofs’ main concern on the legislation for some time because those workers are not eligible for Social Security. So unlike other workers, whose Social Security income would remain exempt from the new tax on retirement income, police and fire workers would not have seen that benefit. Snyder said at the news conference that he is open to that legislation.

Originally, an amendment was expected to put that proposal into the bill, but eventually officials decided not to do so to avoid creating a potential problem with getting House concurrence.

The main bill, HB 4361 , passed 20-19 with Lt. Governor Brian Calley casting the decisive tie-breaking vote. Seven Republicans – Sen. Jack Brandenburg of Harrison Township, Sen. Patrick Colbeck of Canton Township, Sen. Dave Hildenbrand of Lowell, Sen. Joe Hune of Hamburg Township, Sen. Rick Jones of Grand Ledge, Sen. Tory Rocca of Sterling Heights and Sen. Dave Robertson of Grand Blanc – joined all 12 Democrats in opposition. Of that group, all are eligible for re-election and four represent competitive districts.

Democrats said the contents of the bill are at odds with what Snyder promised it would contain.

“We were told our old business tax picked winners and losers and this new tax would not,” said Senate Minority Leader Gretchen Whitmer (D-East Lansing). “However, when I read the bill I saw something completely different. I see that winners are businesses while the losers are working families, retirees and schools.”

Sen. Coleman Young II (D-Detroit) said the bill as written would be a financial blow to seniors. “So let’s don’t give grandma a flying drop-kick,” he said.

Several Republicans from competitive districts who are eligible for re-election voted for the bill, such as Sen. Tom Casperson of Escanaba, Sen. Mike Green of Mayville, Sen. Goeff Hansen of Hart, Sen. Mike Nofs of Battle Creek and Sen. Tonya Schuitmaker of Lawton. Casperson, who last week indicated he was a no vote at that point, said he grew tired of hearing the bill’s critics beat up on business.

“I just found out I guess I’m not part of the middle class because I owned a business,” Casperson said of his time running a small business. “I owned a business. I don’t count.”

THE LEGISLATION: The legislation would repeal the MBT and replace it with a 6 percent income tax on C-corporations. S-corporations, limited liability companies, partnerships and other business entities that, unlike C-corporations, do not sell stock, would instead pay tax on their profits through the personal income tax. However, a number of businesses are likely to remain under the MBT so that they can continue to claim credits that otherwise disappear in the corporate income tax.

For those born in 1946 and afterward, the bills would end the total exemption of pension income from public-sector jobs and end the existing $45,120 exemption ($90,240 for married couples) for pension income from private sector jobs. Those born before 1946 would see no change.

Those born between 1946 and 1952 could claim an exemption of $20,000 ($40,000 for married couples) on their pension income unless their total household income exceeded $75,000 ($150,000 for married couples). And those born after 1952 would only get the $20,000/$40,000 exemption once they turn 67 unless household income topped $75,000/$150,000.

The income tax rate would remain at 4.35 percent through 2012 and then drop to 4.25 percent on January 1, 2013, where it would remain. The rate had been scheduled to fall by 0.1 percentage point a year starting October 1 until it reached 3.9 percent.

The Earned Income Tax Credit would drop from a state credit equal to 20 percent of a filer’s federal EITC to 6 percent.

The $3,700 personal exemption would begin phasing out for those with incomes of $75,000 or more ($150,000 or more for married couples). The $2,300 special exemption for seniors and those receiving unemployment compensation would end. The $600 per child credit for child care expenses would end. And the Homestead Property Tax Credit would be drastically scaled back.

The legislation includes a $1 million appropriation to cover the cost to the Department of Treasury to implement the corporate income tax. That money also has the effect of blocking a voter referendum on the soon-to-be law.

Also passed as part of the package were HB 4362 (27-10), HB 4479 (29-9), HB 4480 (20-19), HB 4481 (20-19), HB 4482 (30-8), HB 4483 (20-19) and HB 4484 (20-19). On the companion bills, usually the same seven Republicans voted no although on HB 4479, three Democrats (Sen. Glenn Anderson of Westland, Sen. Steve Bieda of Warren and Sen. John Gleason of Flushing) voted yes. And on HB 4482, Anderson, Bieda, Gleason and Whitmer voted yes.

Said Rob Fowler, president and CEO of the Small Business Association of Michigan: “This is literally a once-in-a-generation step forward toward creating a business climate that encourages business owners to grow their companies, create jobs and revitalize their communities. We are proud of the state senators who withstood a withering barrage of attacks by opponents and had the courage to vote for a measure that moves Michigan much closer to a prosperous future.”

The retention of EITC, albeit at the reduced 6 percent level, drew praise from Gilda Jacobs, president and CEO of the Michigan League for Human Services.

“This measure preserves the spirit of the Michigan Earned Income Tax Credit,” Jacobs said. “The 6 percent state EITC is a simpler, more efficient and more effective way for Michigan to helps its low-income working families than the earlier complex proposal that included a $25 per child tax credit. We appreciate the willingness of the administration and Senate leaders to work with us to find a way that best targets help to low-income working families. While we would prefer to have the state EITC continued at 20 percent of the federal EITC, we believe this an acceptable compromise give