LANSING, Mich. (MIRS News) – Michigan could allow the income tax to drop to 4.05%, expand the Earned Income Tax Credit (EITC) back to 20% and exempt more retirement earnings from the income tax and still be on solid economic footing for years down the road, according to a long-time Michigan government budget analyst.

State revenues continue to roll in better than expected. State coffers have an unprecedented $9.2 billion on the balance sheet. And, don’t forget about the $1.4 billion Rainy Day Fund. Add all that together and Bob Schneider, senior research associate for the Citizens Research Council (CRC) said “we should be fine.”

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Schneider broke down the fiscal implications of the three major tax cuts on the horizon for the Legislature and Governor during a presentation at the Institute for Public Policy and Social Research’s (IPPSR) monthly lunch forum.

The Governor and legislative Democrats’ phased-in plan to shield more retirement earnings (mostly public pensions and income from public employers) from the income tax, will cost the state roughly $495 million once fully implemented in 2026.

If the EITC is brought back to 20% of the federal credit as opposed to the current 6%, the budget hit is $270 million.

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Knocking the income tax rate to 4.05% will cost $657 million by 2024.

Added altogether, that’s $1.422 billion in lost state revenue (or additional savings to taxpayers) by 2026. But as long as the state doesn’t plunge into a recession and sees around 4% of revenue growth a year every year, there’s nothing to worry about, Schneider said.

“We would still have $1 billion in budget room permanently added, so we should be just fine,” Schneider said. “Let’s say we had a severe recession. We have $6 billion in our fund balances. We have a pretty healthy rainy day fund.

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“So, let’s say we had a severe recession, we wouldn’t have to cut the budget. I think we’re buffered from it right now.”

Under the 2015 gas tax cut, the income tax rate is rolled back if General Fund revenues are more than what they were in Fiscal Year 2021 once adjusted for inflation plus another 40% is added to the mix.

What if that trigger is activated again down the road?

Schneider said the loss in revenue should prevent the state from re-activating the trigger that is expected to knock the state’s income tax rate to 4.05% by next year. Once the income tax rate is at 4.05%, he doesn’t expect the rate reduction trigger put to be reactivated in the near future.

“The trigger is going to bring General Fund revenues down. If it didn’t, we would be more likely to trigger it again,” he said. “Is it impossible? No. It makes it less likely.”

The report is good news for the Governor and legislative leaders who are beginning their conversations on what to do about the 2015 trigger and whether to allow the income tax drop to happen.

Republicans are beside themselves in glee, seeing they’ve wanted an income tax cut for years and it was their policy from 2015 that is making this expected cut happen.

In general, Republicans are supportive of the Earned Income Tax expansion to 20%. Rep. Bill G. Schuette (R-Midland) sponsored that move on the first legislative day of session in the form of HB 4009. The bill looks identical to Rep. Nate Shannon (D-Sterling Heights)’s HB 4002 with the exception of Schuette’s bill allowing Michiganders to claim the larger credit on their 2022 returns.

On the discussion over retirement income, the R’s want to expand the current income exemption of $20,000 ($40,000 if married) to all retirement income for all retirees 62 and older.  Currently, some younger retirees are not allowed to claim this exemption. Also, the $20,000 and $40,000 would be adjusted annually for inflation.

The Democrats’ plan restores the rules on retirement income prior to Gov. Rick Snyder’s reforms in 2011. All public pension income would be exempt from the income tax. A limited amount of other retirement income from IRAs and 401(k)s would be as well.