House Committee Reports Bill Eliminating State Income Tax

 

A plan to eliminate the state’s income tax was voted out of a House committee Wednesday morning. The first full fiscal year impact of this plan would reduce the state’s General Fund by over $1.1 billion, or roughly 10%.  The Michigan Municipal League is actively opposed to this proposal as it could jeopardize the essential services that Michigan citizens rely on, such as police and fire protection, schools and roads.

We need your help to oppose this bill by contacting your State Representatives and letting them know how this proposal will hurt your community and their constituents.

The House Tax Policy committee reported House Bill 4001, a complete repeal of Michigan’s 4.25% personal income tax.  The state income tax brings in more than $9 billion towards the FY16-17 state budget…about 70% of the state’s current $10.8 billion General Fund and more than 20% of the $12.6 billion School Aid Fund.  While the bill would phase out the income tax by .1% per year over about 40 years, the initial reduction would move the rate to 3.9% on January 1, 2018.  The first full, fiscal year impact of over $1.1 billion would occur in FY18-19.

Supporters in committee cited the state’s current estimated budget surplus and previous statutory changes lowering the rate to 3.9% that were never implemented as reasons to move this bill.  It is expected that the House majority will propose an alternative to the Governor’s recommended budget that will reflect the cuts necessary to achieve the reductions that this change would require.

When a similar conversation took place in Lansing in 2015 as part of the road funding debate, MML commissioned a report to examine the impact of a proposed $350-700 million diversion of GF/GP dollars towards road funding would mean to the rest of the state’s budget.  The results of that analysis were not pretty and those same concerns hold true today…items of direct interest to municipalities like revenue sharing, PPT reimbursement dollars, PILT payments, fire protection grants, distressed community grants, and community development funding were all identified as programs that would be at risk in a scenario where the state General Fund undergoes this type of reduction. In addition, the final product of the road funding deal, which obligates an eventual $600 million of income tax dollars will never be able to be met if the income tax is eliminated.

Following opposition from the State Treasurer, the education community and the MI League for Public Policy, the MML joined in testimony against this proposal, urging the committee to consider the budget consequences of such a reduction.

Michigan’s broken fiscal model for local governments simply will not allow for any additional cuts to state support for municipalities.  The League continues to advocate for full restoration of revenue sharing.  This proposal would eliminate any ability for that reinvestment to occur.  While the legislature may view this as a policy debate, a decision of this magnitude will have real-life consequences for every resident of this state.

The bill passed committee on a 7-4 party line vote, with two Republican members abstaining.  It is very likely that the full House will move on this bill quickly now that it is on the floor, possibly ahead of any matching alternative budget proposal.  Please contact your State Representative today and let them know of your concerns about how such a drastic reduction in state revenues will impact the residents and services in your community.

Chris Hackbarth is the League’s director of state & federal affairs. He can be reached at 517-908-0304 and chackbarth@mml.org.