Donald Trump tax cut spurs renewed debate over cutting Michigan personal income tax

LANSING — The long-running debate over a state income tax cut could be about to re-ignite.

This time, it's the recently approved federal tax cut that is triggering the issue.

Though not all economists agree, state officials expect President Donald Trump's tax cut, approved by Congress in December, to result in a $1.4-billion tax windfall for the State of Michigan, because of higher personal income taxes for most Michigan residents.

The federal plan merges the personal exemption, which is reduced from $4,050 to zero, into a larger standard deduction, which is increased from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples.

That change could have implications for state taxpayers, who currently are able to take a $4,000 exemption for each federal exemption they claim. Individuals will lose a $4,000 deduction from their taxable income, and a family of four will lose a $16,000 deduction, House Fiscal Agency Senior Economist Jim Stansell told the Free Press.

That equates to a $170 state tax hike for an individual and a $680 hike for a family of four — both of which would apply to income earned in 2018.

Gov. Rick Snyder has already promised legislation to eliminate what would be an unplanned tax hike and make the change revenue-neutral at the state level.

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Snyder told the Associated Press “the federal tax reform is going to cause people’s Michigan taxes to go up," and "we should figure out how to give that back to the hardworking taxpayers.”

Snyder is expected to propose a new $4,000 exemption or some other change to counter those increases.

"We are awaiting a comprehensive analysis from Treasury before making any decisions or proposals," said Snyder spokeswoman Anna Heaton. "That is expected in early January."

But it's an election year and many Republicans who control the Legislature want to go further than that and pass a deeper personal income tax cut.

Among them is state Rep. Jim Runestad, R-White Lake.

"Certainly, I don't want tax increases — I'm about tax decreases," Runestad said.

Runestad was one of the House Republicans who in February voted to cut the state's income tax rate from 4.25% to 3.9% over four years, only to see the measure — which Snyder and some Republicans opposed — fall short.

Democrats opposed the measure, saying they wanted tax relief targeted more at the middle class.

House Speaker Tom Leonard, R-DeWitt, who is term-limited and running for attorney general, may now revisit the issue.

"I have always been in favor of lowering the tax burden on Michigan families, and I am glad to see the governor is now willing to come to the table and talk about ways to help our hard-working taxpayer," Leonard said through his spokesman, Gideon D'Assandro.

"He and I have not had a chance to talk about this issue yet, but we are reviewing the changes and we will talk about how to handle it soon."

Still, not everyone is convinced the state should even give up the extra revenues the state would gain if it did not adjust for the federal tax cut, since many expect Trump's cut to be followed by cuts in federal payments to the states.

Gilda Jacobs, president and CEO of the Michigan League for Public Policy, said Snyder and the Legislature should proceed cautiously.

"We want to be sure we really protect the vulnerable people in this state," Jacobs said. "Michigan really needs more revenues to improve people's lives."

The state already faces uncertainty over paying for health care and the massive federal tax cut could result in further reductions in federal transfers to states such as Michigan, she said.

"People need to understand that 42% of our state budget comes from the feds — that's huge."

At least one economist says Snyder and state officials have misinterpreted the effects of the federal tax changes.

Patrick Anderson, CEO of Anderson Economic Group said the federal personal exemption has been reduced to zero for the purposes of calculating personal federal income taxes, but it has not been eliminated and is explicitly preserved for other purposes.

Anderson, whose firm has played a significant role in past Michigan tax legislation, said in a Friday letter to Treasurer Nick Khouri that no legislative action is needed and "Michigan's income tax payers will not lose their state income tax exemptions ... and will not be subjected to a large income tax hike."

He advised the Treasury Department to issue an interpretive statement.

Contact Paul Egan: 517-372-8660 or pegan@freepress.com. Follow him on Twitter @paulegan4. The Associated Press contributed to this report.