Gov. Rick Snyder's administration on Monday proposed legislation to ensure that taxpayers do not see their state income taxes rise as a result of the federal tax overhaul, saying Michigan's personal exemption should be increased by $200 more than is scheduled.
Because the state tax code is tied to the federal code, there is concern that the reduction of the federal personal exemption to zero also nixed the state exemption and will lead to a big tax hike if no action is taken.
The legislative fix, first outlined to The Associated Press by Lt. Gov. Brian Calley, would essentially clarify that Michigan's state income tax exemptions continue and also gradually increase the state exemption to $4,500 by 2021. Under current law, it will rise to $4,300, from $4,000, by then.
"The simplest, most fair answer is to restore that exemption and then increase it over the next few years to $4,500 to ensure that Michigan families are protected, that they get whatever tax savings that is due to them at the federal level and that they don't lose anything at the state level. In fact I think most people will save a little more here at the state level, too," said Calley, a Republican who is running to succeed the term-limited Snyder.
According to the administration, taxpayers will pay $840 million more in 2018 and $1.6 billion-plus more in 2019 without action. Calley said 98 percent of the impact is because of changes to federal personal exemptions, but raising the state exemption would offset other impacts that will result in tax increases and decreases for some taxpayers depending on the year. He mentioned the elimination of deductions for moving expenses as one example.
On Friday, state Attorney General Bill Schuette, who also is running for governor, said Michigan should not only move to avoid a state tax hike but quickly adopt his plan to reduce the income tax rate from 4.25 percent to 3.9 percent — where it was a decade ago. He said "avoiding a massive, unintentional tax increase is simply not good enough."
Asked Monday if he supports dropping the income tax to 3.9 percent, Calley said: "We can always have those kinds of discussions, but this is more urgent." Legislation to cut the tax rate failed in the GOP-controlled Legislature last year.
More than 40 states have income taxes, and nearly all of them rely to some degree on definitions from the federal tax code. Michigan appears to be among the first where bills will be introduced.
Economists expect that many states will see their revenue rise because they tie their tax laws to federal provisions such as those on personal exemptions, which lower the bills based on the size of households.