Michigan's flush revenues draw Democrats and Republican to tax cut debate

Michigan’s multi-billion dollar revenue windfall puts tax relief front and center for Democrats and Republicans alike as the legislative session and budget season heats up.

While both sides of the aisle are pushing for tax cuts, the form they would take remains the subject of debate.

Gov. Gretchen Whitmer, a Democrat who is up for re-election in November, laid out her priorities during her State of the State address earlier this week. She will pursue several relief measures that include phasing in a tax exemption on retirement pension income and tripling the earned income tax credit. Combined, they carry an eventual $730 million price tag for state coffers.

Michigan governor's office

“I’m putting forward proposals that will build on the work we’ve done together and grow our economy by cutting taxes and lowering costs,” Whitmer said during her state of the state address. “My proposals tonight will cut taxes for seniors and working families.”

Whitmer previously sought in 2019 to eliminate the retirement tax but Republicans who control the legislature rejected the idea. Whitmer also said she intends to outline the “biggest state education funding increase in more than 20 years —without raising taxes” when she releases her budget in February, with more money included for mental health initiatives.

Democrats praised Whitmer’s proposals but GOP leaders have their own ideas.

“We will definitely take her up on her offer to work together. But I think we were all hoping for a little more from this speech,” House Speaker Jason Wentworth, R-Farwell, said in a statement.

“I’ve always supported putting money back into the pockets of taxpayers. The focus is to find a way to responsibly provide relief, knowing that our current level of revenue is not sustainable with much being one-time federal funding,” Senate Appropriations Committee Chairman Jim Stamas, R-Midland, said in a statement.

The governor’s address followed a Senate committee’s passage of a Republican-backed tax relief proposal that would cut the individual income tax to 3.9% from 4.25% and corporate income tax rates to 3.9% from 6%. The package also provides $500 child tax credit.

The proposals carry a $2.4 billion price tag in fiscal 2023 when fully implemented with the individual cut accounting for $1.1 billion of lost revenues, the corporate income tax reduction making up $465 million and the tax credit costing about $800 million, according to an assessment from the Senate Fiscal Agency.

Democrats questioned whether the state could afford the long-term impact of the cuts. Business groups have endorsed the Senate proposal.

Michigan’s revenue estimating conference earlier this month lifted projections for the current fiscal year that runs through Sept. 30 by $1.72 billion to $28.53 billion compared to the previous estimating conference in May. The group raised fiscal 2023 estimates by $1.4 billion to $29.14 billion, leaving several billion in play for the coming budget.

In addition to the higher revenues expected in the current and next fiscal year, the state still has about $5.3 billion is available discretionary funds to allocate from its share of the American Rescue Plan Act and another $1.8 billion related to programmatic spending. The state additionally is receiving $563 million for roads and bridges from the federal government’s infrastructure package.

ARPA relief dollars can’t fund tax cuts, according to guidance from the U.S. Treasury.

Rosier revenue projections last May continued and helped ease tensions between Whitmer and the GOP leaders as they agreed to a budget framework in the spring. Michigan entered fiscal 2022 in October with a $70 billion budget. The budget made a $500 million deposit into the rainy day fund that restores a $350 million draw early in the pandemic bringing the balance to $1.38 billion.

The state’s brighter economic prospects drew two rating outlook boosts in June when Fitch Ratings lifted the outlook on its AA rating to positive from stable and S&P Global Ratings raised the outlook on its AA rating to stable from negative. Moody’s Investors Service rates Michigan Aa1 with a stable outlook.

Whitmer also used her speech to take a victory lap on General Motors’ announcement earlier in the week that it would invest $7 billion in electric vehicle production in the state. Michigan is providing about $800 million of incentives to the company from a newly created $1 billion economic incentive program Whitmer and lawmakers set up after losing the competition to house a Ford Motor Company electric vehicle expansion.

“Now this substantial investment keeps Michigan in the game,” Joseph Krist, publisher of Muni Credit News, said in his weekly report.