Jonathan Oosting

Detroit News Lansing Bureau

Lansing — A controversial plan to cut Michigan's personal income tax rate was defeated early Thursday morning in the state House, a stunning failure for a bill backed by new Republican House Speaker Tom Leonard but opposed by GOP Gov. Rick Snyder.

Leonard and other House leaders spent most of Wednesday pulling individual legislators off the chamber floor for private discussions in hopes of securing support for the proposal to reduce the state’s income tax rate from 4.25 percent to 3.9 percent by 2021.

The process continued past midnight and into Thursday morning, when Leonard concluded the 12-hour marathon session by calling for a vote on a modified version of the bill. It failed 52-55 but could be reconsidered at a later date.

“It’s unfortunate,” Leonard said after the vote, which largely fell along party lines. “We wanted to produce legislation that was going to bring income tax relief to the hardworking taxpayers of the state."

The third-term DeWitt Republican told reporters he had a strong suspicion the measure would fail but said an “overwhelming majority in my caucus wanted to let the world know where they stood.”

Only one Democrat voted for the tax cut plan, which was supported by 51 of 63 Republicans.

House Minority Leader Sam Singh, D-East Lansing, said Democrats are open to a more targeted form of tax relief. But members of his caucus argued the GOP plan would disproportionately benefit wealthy residents while forcing potential funding cuts for various government services.

“We will not be willing to bust the budget at the expense of our roads, our schools and our police and fire,” Singh told reporters after the vote. “We look forward to having a real conversation about real tax cuts to real working people.”

Michigan has a flat income tax, meaning all taxpayers would have received the same rate reduction under the proposed cut, but higher earners would have saved more in actual dollars.

The plan was projected to save taxpayers – but cost state government – $1.1 billion a year if fully implemented. Snyder, who had urged House Republicans to outline and spending cuts the tax plan could force, said Tuesday he had “a billion dollars worth of concerns” over the long-term budget impact.

Supporters said they wanted to fulfill a promise made in 2007 when then-Gov. Jennifer Granholm and state legislators temporarily raised the rate to 4.35 percent to balance the budget and end a brief government shutdown. The rate was scheduled to drop to 3.9 percent by 2015 but was frozen at 4.25 percent under Snyder.

“Not only is this good policy, it is the right policy, because in government there is nothing more important that keeping your word to the people,” said sponsoring Rep. Lee Chatfield, R-Levering.

Under the legislation, as modified ahead of the unsuccessful floor vote, the planned income tax rate reduction could have been halted at 4.05 percent in 2019 if the balance of the state’s “rainy day” fund fell below $1 billion.

Michigan currently has $734 million in the savings account, which could be tapped in the case of a future budget crunch, but Snyder has proposed additional investments to raise the balance above $1 billion next year.

A rocky start for Leonard

Leonard and Chatfield hoped to advance the tax policy proposal early in the year to shape negotiations with Snyder and senators on the 2018 budget, which all sides hope to finalize by mid-June.

But the process was “totally in reverse,” according to state Rep. Larry Inman, R-Traverse City, a vocal opponent of the plan who joined Snyder in calling for Republican leadership to identify any spending cuts it could have forced.

“I’ve got a lot of concerns about just walking blindly into this thing and then letting them look like they’ve accomplished their goal but leaving us with the responsibility of deciding the cuts later,” Inman said.

Leonard, who took over the speaker’s role in January, has made tax relief one of his top priorities. The income tax bill was the first measure introduced in the House this session, and it was the first bill he scheduled for a floor vote this year.

But following Thursday’s unsuccessful vote, Leonard accused Rep. Jason Sheppard, R-Temperance, of lying about his position on the tax cut legislation and stripped him of his role as chair of the House Financial Services Committee.

“The representative from Monroe County looked me in the eyes, told me he was going to be a yes vote, and voted no,” he told reporters before announcing Sheppard's chairmanship will be filled by Rep. Diana Farrington, R-Utica.

Tom Shields, a Lansing-based Republican consultant, said it was “very odd” for House leadership to force a late-night session so early in the two-year cycle, but it made sense for Leonard to push the tax cut early this year if he truly wanted to impact 2018 budget negotiations.

“From that standpoint, I think he’s being practical about it,” Shields said late Wednesday while the House was at a standstill. “However, given the nature of this issue, a lot of people think it’s moving too fast.”

The “messy process” is a reminder there’s “obviously a learning curve for a new speaker,” said Susan Demas, owner and editor of Inside Michigan Politics, who noted House Republicans enjoy a strong majority.

“Usually if you’re going to take on something ambitious like this, you feel confident you’ve got the votes for it, and I think a lot of people assumed that Leonard had votes,” she said.

While Leonard may have frustrated some colleagues in the state Legislature, Demas suggested his unsuccessful income tax cut push could still benefit him if he decides to seek the GOP nomination for attorney general in 2018, as many observers expect.

“Convention fights tend to be among the most conservative members of the Republican Party, and this is a policy that will play very well with them,” she said.

Budget implications a sticking point

State Rep. Scott Dianda of Calumet was the lone Democrat to support the tax cut plan, suggesting some of his constituents in his Upper Peninsula district “are starving.”

Dianda noted the state budget has grown since he took office four years ago. Snyder signed a $49.5 billion budget for fiscal year 2014. The governor’s 2018 proposal totals $56 billion.

“I hope they got the political strength to start talking about this budget because it’s not working for everybody,” he said ahead of the floor vote, criticizing “corporate welfare” spending but calling for increased state revenue sharing for local government.

The House plan, if fully implemented, would have reduce projected tax collections by $195 million in fiscal year 2018, $463 million in 2019, $779.5 million in 2020, $1 billion in 2021 and $1.1 billion in 2022, according to the House Fiscal Agency.

While a portion of income tax revenue goes to Michigan schools, state law would essentially hold that funding harmless, analysts said. Instead, “the entire reduction would be borne by the general fund,” the state’s primary checkbook for discretionary spending.

The state is projected to pull in $10.29 billion in general fund revenue this year, a figure that is expected to rise by $232.6 million in fiscal year 2018 and $66.6 million in 2019. Leonard argued the tax cut plan would not have forced any immediate cuts.

But with general fund growth projected to slow in future years, state Treasurer Nick Khouri has cautioned lawmakers against cutting income taxes and disputed arguments that resulting increases in economic activity could offset any revenue losses.

The Snyder administration has also warned legislators their peers and predecessors have already approved tax and fee reductions set to drain state coffers by $2.1 billion over the next three years. Additionally, a new road funding law will draw revenue from the general fund, beginning with $150 million in 2019 and topping out at $600 million in 2021.

Leonard and Chatfield on Tuesday backed off a more aggressive plan to eliminate the state income tax over 39 years, but Snyder remained opposed to the revised version.

“Improving our infrastructure shouldn’t be postponed, and so I’d like to see a public plan as to how this will be paid for before I can lend my support to the new proposal,” the governor said in a statement.

State Senate Majority Leader Arlan Meekhof has said tax relief is also a priority for the Republicans in the upper chamber but has been non-committal about various House plans, including Tuesday’s revision.

“They must not have had the votes for the previous plan, otherwise they would have run it,” Meekhof, R-West Olive, said earlier Wednesday.

“If they’re successful in sending it over, we’ll take a look at it. We have lots of other ideas that the Senate’s working on giving people value for their money, and we’re going to continue to look at those things to make sure Michigan functions.”

joosting@detroitnews.com