income tax

The House Tax Policy Committee takes testimony from Tony Daunt of the Michigan Freedom Fund, who supports a bill to roll back the state's personal income tax at a Feb. 15, 2017 hearing.

(Emily Lawler | MLive.com)

LANSING, MI -- The House Tax Policy Committee on Wednesday approved legislation that would lower and eventually eliminate Michigan's personal income tax.

The current income tax is 4.25 percent. Under House Bill 4001 it would decrease to 3.9 percent on Jan. 1, 2018 and decrease by 0.1 percent each year afterward until it reaches 0 percent in 2057. The committee approved it 7-4-2 along mostly party lines.

Bill sponsor Rep. Lee Chatfield, R-Levering, said the state had seen economic successes in the past few years, and it was time to pass that success down to working people.

"I believe there's no better time than now that we, as legislators, give our constituents across the state meaningful tax reform," Chatfield said.

According to an analysis from the House Fiscal Agency, the proposal would reduce net income tax revenue by $680 million in Fiscal Year 2018 and $1.12 billion in Fiscal Year 2019. The incremental 0.1 percent personal income tax decreases in subsequent fiscal years would decrease revenues by roughly $400 million per year.

And that's a budget hole, said Michigan Treasurer Nick Khouri, who questioned how the legisalture would make it up. He pointed to the constitutional requirement that Michigan have a balanced budget. The legislature would either have to raise an additional funds to fill that hole or spend far less to make up for it. It's about a 10 percent hit to the General Fund, Khouri said.

"In some ways, talking about the merits of this bill is impossible without talking about the other side," Khouri said.

But Chatfield deferred all questions about how to replace lost revenue to the House Appropriations Committee, saying they would "make it work." The people of Michigan can afford this tax cut "if politicians don't overspend," Chatfield said.

That philosophy won support from Pete Lund, state director of Americans for Prosperity Michigan. As a former lawmaker, he's familiar with finding money for priorities in the Senate.

"Remember, you're cutting that money and that money is going to stay in the pockets of the people who earned it," Lund said.

But Gilda Jacobs, executive director of the Michigan League for Public Policy, testified in opposition to the bill.

"This is not an experiment. We know that there are consequences to doing this," Jacobs said.

Chatfield said the proposal would grow the economy overall by growing the state's workforce and giving people disposable income. Chatfield estimated that a household with two working Michiganders could see a savings of around $200 on its tax bill.

"To the working man, that is something that they will feel," Chatfield said.

But Jacobs said the bill wouldn't grow the economy.

"Instead, it will leave our state unable to invest in our schools, colleges and universities, communities, infrastructure, healthcare and public safety--the things that actually fuel economic growth," Jacobs said.

Money from the income tax goes into the School Aid Fund, which funds schools, and the state's General Fund, which funds state programs including some state departments and the prison system. But the House Fiscal Agency analysis says a statutory formula already in place holds the School Aid Fund harmless, meaning the entire reduction would be to the General Fund.

But that didn't stop school groups from being opposed to the bill. Jennifer Smith, director of government relations Michigan Association of School Boards, testified against it. She said the organization was concerned it put undue pressure on the general fund.

"There are many programs within the general fund that benefit our students beyond the classroom," Smith said.

The bill heads now to the House Floor, where the whole House is able to vote on it at any time. Tax Policy Committee Chair Jim Tedder said the House Appropriations Committee would work on the fiscal side of the issue, but he wanted to get this bill on the table before the appropriations process got too far along. The bill would have to pass the full House and Senate and earn a signature from Gov. Rick Snyder -- who has expressed concerns with the proposal -- to become law.

The Senate is considering

to roll back and eliminate the state's personal income tax.