Michigan Democrats reach deal on wide-ranging tax cut, featuring rebate checks

Lansing — Michigan Gov. Gretchen Whitmer and the Democratic leaders of the Legislature are preparing a sweeping tax relief proposal they say will reduce tax bills by more than $1 billion and include rebate checks that could be issued directly to residents.

The Friday agreement focuses on a plan to ease taxes on retirement income, boost a tax credit for low-wage workers and issue "inflation relief checks" in place of a potential cut in the state's personal income tax, which was expected to be triggered by growing revenues, according to a source familiar with the plan.

"We are poised to deliver the biggest tax relief to Michiganders in decades," Whitmer said Friday at an event in Detroit. "... This is the way we can quickly get money into people’s pockets."

The full details of the Democratic plan were not immediately available Friday afternoon, including the size of individual rebate checks, and the legislation will have to be voted on. Lawmakers are scheduled to return to the Capitol on Tuesday, and Whitmer is set to present her next budget plan to the Legislature on Wednesday.

Whitmer said Friday more details about the tax relief plan would be released Monday, including how the state's economic development subsidies for businesses that promise to create new jobs may factor into changes to state tax policy.

“You’ll be able to have the ability to really look through all the different facets of it,” the Democratic governor told reporters Friday. “... There are a lot of different pieces that we are still working through."

Michigan Gov. Gretchen Whitmer, left, and Lt. Gov. Garlin Gilchrist II high five Friday, Feb. 3, 2023, before the governor signs an executive directive to increase the number of contracts the state holds with businesses from urban and rural parts of the state at an event at the Michigan Minority Supplier Development Council's offices on Detroit’s riverfront.

In recent weeks, as the state sits on a surplus of more than $9 billion, Republicans in the House and Senate have called for a broad tax cut for Michiganians and the preservation of the potential automatic drop in the personal income tax rate, which is being caused by language in a 2015 law. That policy tied the income tax, currently at 4.25%, to revenues for the state's general gund.

The nonpartisan House Fiscal Agency in January estimated that, based on preliminary fiscal year 2022 revenue figures, the revenue trigger would be activated and lower the income tax rate for the 2023 tax year from 4.25% to 4.05%.

It's unclear how Republicans will view the idea of issuing rebate checks instead of decreasing the income tax rate. Democrats will likely need at least some GOP senators to endorse the plan in order to get the required two-thirds support in the chamber to allow the legislation to take effect immediately. Rebates are typically one-time spending bursts, while cuts in the income tax rate usually are kept in place for multiple years.

Republicans react to plan

Democratic lawmakers, who took control of the House and Senate on Jan. 1, have already advanced two targeted tax relief proposals that have been key points of Whitmer's agenda for the year.

One would decrease taxes on retirement income, restoring an exemption for public pensions and larger deduction limits that were undone in 2011 under then-Gov. Rick Snyder, a Republican. Whitmer's office has said that proposal, as voted on in the Senate, would benefit 500,000 households. Under the new deal, the retirement changes would be phased in over four years.

The other Democratic proposal would increase the state's Earned Income Tax Credit from 6% of the federal credit to 30%, helping an estimated 700,000 families in Michigan.

This week, Democrats have been contemplating how to merge the House and Senate versions of the bills and whether to alter the income tax trigger as part of the overall plan. On Tuesday, the governor confirmed her administration was "analyzing" the potential automatic income tax cut.

Whitmer, Senate Majority Leader Winnie Brinks, D-Grand Rapids, and House Speaker Joe Tate, D-Detroit, labeled their proposal the "largest tax cut in decades" in a Friday statement.

“It’s time to get this done because Michiganders deserve it, and with bipartisan support, Michiganders will see more money in their bank accounts this year," said the statement from Whitmer, Brinks and Tate.

Legislative Republicans have called on Whitmer not to disrupt the potential income tax rate change.

"She should promise every Michigander that she won’t interfere with the income tax cut they’ll receive this year," House Minority Leader Matt Hall, R-Richland Township, said last week.

Senate Minority Leader Aric Nesbitt, a Republican from Van Buren County, said Friday he was "cautiously optimistic" about Whitmer's commitment to tax relief.

"But when it comes to lower taxes, her actions have too frequently failed to match her words," Nesbitt said in a statement. "Michiganders have too often played Charlie Brown to the governor’s Lucy as she yanks away her promises of tax relief at the last second.”

One Republican-allied political group panned the tax relief deal if it prevents a potential cut in the state's income tax from going into effect.

“The Democrats' proposal is a head fake intended to hide their attempt to rob Michigan taxpayers of an income tax cut in favor of funding a corporate welfare slush fund — prioritizing big corporations over Michigan families," said Sarah Anderson, executive director of the Michigan Freedom Fund.

Whitmer said Friday she expects Republicans will get on board with the tax relief plan once they see it.

"I anticipate and look forward to bipartisan support because this is one of those opportunities I think everyone in the Legislature is going to want to be a part of," she said.

An ever-changing tax rate

The proposed Democratic plan, depending on its specifics, could bring one of the largest one-year net tax decreases in Michigan history.

Robert Schneider, senior research associate at the Citizens Research Council of Michigan, said in the past, there have been large cuts for one type of tax paired with increases in other types, such as the tax overhaul that benefited businesses in 2011 and was championed by Snyder.

Between 1999 and 2004, the state's income tax was phased down from 4.4% in 1999 to 3.9% in 2004, noted Schneider, who previously worked in the nonpartisan House Fiscal Agency.

In that plan, revenue declined about $1 billion annually, which was more than 10% of the state’s General Fund back then, Schneider said.

In 2007, Democratic then-Gov. Jennifer Granholm and a Republican-controlled Senate and Democratic-controlled House raised the income tax rate to 4.35% as the state was facing a massive budget deficit amid a single-state recession.

Snyder's 2011 tax code changes, which featured a $1.8 billion reduction in tax bills for businesses, stopped a planned rollback of the income tax to 3.9% and made a single reduction from 4.35% to 4.25% in 2013.

cmauger@detroitnews.com