Kathleen Gray

Detroit Free Press Lansing Bureau

LANSING — Under pressure from Democrats and Republicans including Gov. Rick Snyder, a proposal to gradually eliminate the state's 4.25% income tax was scrapped Tuesday for a plan that would cut the tax to 3.9% over four years and leave it at that level.

State Rep. Lee Chatfield, R-Levering, who sponsored the bill, said the goal all along was to provide tax relief for Michigan families and deliver on a promise made in 2007 — before the last recession — to reduce the state's income tax to 3.9%.

"The initial goal was always to deliver on the promise first made in 2007, and we think this substitute (bill) solves that problem," he said. "There will be income tax relief felt all the way across Michigan."

The House moved the substituted bill to a final vote that could happen as soon as Wednesday.

The vote would come less than a week after a 90-minute committee hearing on gradually eliminating the state's 4.25% income tax, which is the state's primary source of revenue for the general fund.

The new version of the bill would reduce the income tax, beginning on Jan. 1, 2018, by 0.1% each year for the next three year and by 0.05% in the fourth year to get to 3.9%. The lost revenue in the first year, which comes three months into the fiscal year, would be $195 million; in the second year, it would be $463 million; in the third year, it would be $780 million, and by the fourth year, $1.1 billion.

Republicans said it's an ideal way to spur the state's economy. "As Republicans, we believe the less tax burden on the people of our state, the more our budget will grow and the more our economy will grow," Chatfield said.

Democrats and others argue that the bill blows a $1.1-billion hole in the budget without any plans to replace the money.

"I still see this as a billionaire tax giveaway," said state Rep. Jon Hoadley, D-Kalamazoo. "When we make major policy changes without figuring out where that money is coming from — you would never run a business that way.

"We're talking about a tax cut that could potentially decimate the services people care about, like the police on their streets and kids in the schools. I've seen no plan on how to fill these critical needs."

Snyder wasn’t convinced that the new plan was better than the old proposal.

"I appreciate that House leadership took seriously my concerns about the long-term impact of the proposal," he said in a statement Tuesday evening, "but I still have a billion dollars worth of concerns because there has been no plan presented as to how this will affect residents and their communities statewide.

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University of Michigan President Mark Schlissel, who was at the Capitol on Tuesday, said the proposal wasn't "conservatism. It's radicalism."

"We’re concerned not just for the university, but the state as a whole. The state is doing well and continues to recover, but this is a time to continue to invest in our collective future," he said.

"Our fear is that if the resources available to state government are constrained by such a large tax cut, we won’t be able to maintain accessibility to a great higher education at the same cost now. Families are already struggling to pay for college, and we don’t want to make those challenges greater. It's not just higher ed, it’s community colleges, it's schools, it’s infrastructure we’ve promised our fellow citizens we’re going to take care of. It’s the aid we return to our cities that allows them to provide services to our fellow citizens."

He urged the Legislature to "slow down" and look at the consequences.

The House Tax Policy Committee voted last week to send the bill to the full House of Representatives, despite it not having unanimous support from Republicans and no support from Snyder, who told the GOP it should be more thoughtful and deliberative before taking such a drastic course of action.

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State Treasurer Nick Khouri told lawmakers last week that Michigan has the lowest income tax rate of the five Great Lakes states and ranks 14th best in the nation in relative tax burden.

State Rep. Jim Tedder, R-Clarkston, chairman of the Tax Policy Committee, said the House wants to cut the tax now and let the Appropriations Committee figure out how to fill the budget hole.

Other supporters of the bill said now is the time to cut the income tax, when the state budget is stabilized with surpluses and Snyder has suggested adding $260 million to the state's rainy day fund, bringing that total to $1 billion. If the state’s taxpayers have more money in their pockets, said Chatfield, it will lead to more economic activity. And besides, Chatfield said, in the last seven years, lots of tax cuts have gone to businesses, but working people have been left out of any tax benefits.

Opponents said every aspect of the state's budget will be affected, from revenue to local units of government that go to police and fire protection to environmental safeguards and testing to schools.

Democrats tried to add amendments to the proposal that would implement a graduated income tax and keep the tax rate at 4.25% for anyone who makes at least $70,000 a year. Those amendments failed.

There are seven states without an income tax — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — but most make up the difference with higher sales or property taxes or much higher state revenues from taxes on coal mining (Wyoming) or oil drilling (Alaska).

Contact Kathleen Gray: 313-223-4430, kgray99@freepress.com or on Twitter @michpoligal