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Debate over speed, reach of tax cut looms over Whitmer's State of the State

Delta Township — Gov. Gretchen Whitmer's campaign to provide tax cuts for retirees and low-wage workers is expected to be a focus of her fifth State of the State address Wednesday night as disagreements have emerged in the Michigan Capitol over the timing and reach of the plans.

The push for financial relief amid high prices and inflation nationwide will be a key early test of Whitmer's second term and her ability to forge consensus in a Legislature that her Democratic Party narrowly controls. Whitmer has been advocating for the policy changes for a decade since she was a lawmaker herself and the state's tax system was overhauled by then-Gov. Rick Snyder, a Republican.

Whitmer wants to reverse Snyder's changes to how retirement income is taxed, bringing back an exemption for public pensions and restoring higher deduction limits.

"My goal is to get money in the pockets of people who are living on fixed incomes and who are struggling with inflation and all the pressures of a changed law," Whitmer said Tuesday. "And undoing that change is the first step in my estimation."

Democrats have proposed bills that would eventually decrease taxes on retirement income by about $500 million a year. However, some lawmakers are frustrated the proposal gradually phases in the changes over a period of four years despite the state having a $9 billion surplus. Other lawmakers are concerned the legislation treats income from public pensions differently than other forms of retirement income.

State Sen. Joe Bellino, R-Monroe, described the four-year phase-in as "such a crock" given the money available to lawmakers. Bellino also said he would have to hire a tax lawyer to decipher all of the details of the Democratic proposal.

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"It is not fair, and it is not equitable," Bellino said.

Whitmer will give the first State of the State speech of her second term Wednesday inside the state Capitol. and public television stations across the state will air Whitmer's speech live at 7 p.m.

The Democratic governor will lay out her agenda for the year, including calls for new restrictions on firearms and spending on law enforcement, education and economic development. She also is expected to use the speech to continue her focus on lowering costs for residents by making targeted tax cuts.

If Whitmer is successful at getting her new proposals into law this year, it will mark success in a fight she and others have been waging for a decade. She was serving in the state Senate minority when Republicans passed sweeping tax changes in 2011. At the time, she said the GOP had picked winners and losers with the losers being "our working families, our retirees and our kids."

“People are going to really revere her as somebody who got it done," said Melissa Seifert, the associate state director of government affairs for AARP.

Earned Income Tax Credit

The 2011 tax overhaul reduced the state's Earned Income Tax Credit, which benefits low-wage workers, from 20% of the federal credit to 6%. Whitmer wants to see it expanded this year.

On Tuesday, a Michigan Senate committee approved a proposal that goes further than the pre-2011 law to increase the state EITC to 30% of the federal credit.

Originally, the bill was going to phase in the change over four years, like the retirement proposal, but the Senate Housing and Human Services Committee, chaired by Sen. Jeff Irwin, D-Ann Arbor, removed the phase-in Tuesday to go directly to 30%.

The bill is expected to decrease state revenues by about an estimated $400 million a year and benefit about 700,000 families.

"People in Michigan need tax relief now, and we're committed to building the economy from the bottom up, not the top down, so providing immediate and significant tax relief to working people is our top priority," Irwin said.

The timing of the retirement tax overhaul would be a separate debate, Irwin said.

Republican lawmakers proposed their own bill earlier this month to increase the EITC to 20% for the 2022 tax year.

“House Republicans have been saying all along: The people of Michigan need relief immediately to help with the rising cost of living," said House Minority Leader Matt Hall, R-Richland Township.

Retirement tax debate

The retirement tax debate's roots also lie in sweeping changes Snyder signed into law in 2011.

A portion of that overhaul affected retirement income. For those born after 1945, the Snyder era policy lifted an income tax exemption for public pension income and put new and lower limits on retirement income that can be deducted from the income tax.

In 2014, Snyder contended the change made things "fair between people who had retirement income and people who had working income."

But over the last decade, Democrats, including Whitmer, and some Republicans, like Bellino, have pushed to undo the retirement tax changes from 2011 and argued past lawmakers wronged retirees by switching tax standards on those who were planning their financial futures. Some proponents of altering the Snyder law have labeled the campaign "repealing the pension tax."

But the new bills are not a direct repeal.

Instead, in their current forms, they would generally put the tax policy that was in place before Snyder back in effect over four years, exempting public pension income and restoring the larger deductions for those born after 1946.

Whitmer's administration has said eventually the bills would affect 500,000 households in Michigan, saving them an average of about $1,000 a year.

For the 2023 tax year, under the Senate bill, a taxpayer who was born after 1945 and before 1959 could deduct an amount of retirement or pension benefits not to exceed 25% of the maximum amount available before the Snyder changes, according to the Senate Fiscal Agency.

For the 2024 year, a taxpayer who was born after 1945 and before 1963 could deduct an amount of retirement or pension benefits not to exceed 50%.

By the 2026 year, the pre-Snyder policy would be back in 100% effect with public pension income exempt and larger deductions for those with other forms of private retirement income. For the 2021 tax year, the private deduction limits that would be back in full effect were $54,404 for single filers and $108,808 for joint filers born. The limits are tied to inflation.

Under the existing Snyder policy, for those born after 1952, the exemption thresholds are $20,000 for single filers and $40,000 for joint filers once they reach 67.

'Love to just repeal it'

Alex Silvestri, a retired firefighter who lives in Rives Junction outside of Jackson, spoke out in favor of the proposed retirement tax changes from Michigan Democrats during an event with Whitmer on Tuesday in Delta Township. Former firefighters, police officers and teachers thought their pensions would be exempt from taxes but then the law was changed on them, he noted.

"We have less coming out of it," Silvestri said.

Seifert of the AARP echoed that idea, noting that people were relying on the idea that their pensions wouldn't be taxed.

But Patrick Anderson, CEO of the Anderson Economic Group in East Lansing, said the new proposal represented "a complete, open exemption" for government employee pensions. And Bellino said the tax breaks should be more equitable among those with public pensions and those with income from other sources, such as a part-time job or 401(k) retirement account.

Rep. Angela Witwer, D-Delta Township, chairwoman of the House Appropriations Committee, said there are ongoing discussions about changing the current proposals to provide additional relief to retirees with income from sources other than public pensions so the bills don't pick winners and losers.

Witwer is the primary sponsor of the House bill to change the retirement taxes. Asked about the four-year phase-in, she said lawmakers have to be responsible with taxpayers' money.

"I would love to just repeal it immediately," Witwer said. "But it looks like we'll probably pass the one that is phased in."

The Senate Finance, Insurance and Consumer Protection Committee is scheduled to consider the Senate version of the proposal at 12:30 p.m. Wednesday.