- New law expands Earned Income Tax Credit, repeals pension tax
- GOP blocked $180 rebate checks in favor of income tax rate cut
- Qualifying filers will start seeing relief in tax year 2023
LANSING — Calling it “a new day in Lansing,” Democratic Gov. Gretchen Whitmer on Tuesday signed legislation to expand the Earned Income Tax Credit for lower-income workers and repeal the so-called pension tax on retirement income.
The new law won’t include $180 inflation relief checks for all tax filers this spring, as the governor had proposed, and other forms of relief will be delayed because Senate Republicans denied the bill “immediate effect” in order to preserve a potential permanent income tax rate reduction.
But the law still amounts to nearly $1 billion in annual tax relief for lower-income workers and retirees who will qualify for new exemptions, beginning next year.
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Under the Democratic-sponsored legislation, the state will also put $500 million in corporate income tax revenues over each of the next three years into a business incentive fund designed to lure major developments to the state.
It’s the largest Michigan tax code rewrite since 2011, when then-Gov. Rick Snyder and a Republican-led Legislature slashed business taxes but for the first time began taxing pension income and reduced the Earned Income Tax Credit.
The GOP “gutted” the tax credit for working families and unfairly raised taxes on seniors living on fixed incomes, Whitmer, who was a state lawmaker at the time, said 12 years later as she signed a law reversing those changes.
“It was wrong then, and today we are making it right,” the governor said at a press conference in the Michigan Capitol’s Heritage Hall. “People have been fighting to get this done for more than a decade.”
Whitmer was joined by Lt. Gov. Garlin Gilchrist, Senate Majority Leader Winnie Brinks, House Speaker Joe Tate, AARP state director Paula Cunningham and Paula Herbart, president of the Michigan Education Association union.
Who will benefit and when? Here’s what you need to know:
1. Earned Income Tax Credit expansion
The new law will increase the Michigan Earned Income Tax Credit from 4 percent of the federal level to 30 percent of the federal level, boosting average state savings from $150 to nearly $600.
That change could benefit 738,000 residents who qualified for the credit in 2019, the most recent year with comparable data.
The EITC, first implemented at the federal level, provides a refundable tax credit to people who work but don’t make much money. For 2022, a married couple with two children could qualify if they earned less than $55,529 combined.
Federal credits last year ranged from $560 to $6,935, while the Michigan version ranged from $34 to $416 and averaged $150. Under the new law, those state credits would have ranged between $168 and $2,080 and averaged $750.
The expansion will take effect in the 2023 tax year and so would impact 2024 filings. Lawmakers also included a retroactive provision that will require the state treasury to issue refund checks for tax year 2022 EITC filers, according to the nonpartisan Senate Fiscal Agency.
But those refund checks won’t go out until next year because Republicans denied the bill immediate effect, according to Sen. Sen. Kristen McDonald Rivet (D-Bay City), who last week introduced new legislation to speed up that relief.
“We need to go back and see if we can broker some bipartisan commitment around this one thing, because these are the most vulnerable among us,” McDonald Rivet told Bridge Michigan on Tuesday.
The EITC expansion is expected to reduce state revenue by $883 million in fiscal year 2024 but that reduction will be closer to $441 million in future years.
2. Pension tax repeal
The new law will restore a full tax exemption on pension income, repealing a 2011 tax over the course of the next four years and fulfilling a campaign promise Whitmer first made in her first 2018 campaign for governor.
Beginning in tax year 2023, filers will be able to choose whether to take advantage of the phased-in pension exemption or continue to claim an existing exemption for any type of retirement income, up to $20,000 for an individual or $40,000 for joint filers.
The Whitmer administration estimates the new law will mean an average savings of $1,000 for 500,000 households that have pension income.
The change is expected to cost the state about $281 million in lost revenue next year and $492 million once fully implemented in fiscal year 2027.
Cunningham, the Michigan AARP Director, called the 2011 decision to tax pension income a “shameful” move that “broke a promise to retirees” who had planned their lives around fixed incomes.
The new law signed by Whitmer “rights this wrong,” Cunningham said in a statement.
3. Business incentive funding
The new law will also help support the Strategic Outreach and Attraction Reserve Fund, or SOAR, a business incentive program the state has used to lure high-profile investments, including most recently Ford’s planned $3.5 billion electric vehicle factory in Marshall.
Michigan lawmakers have approved SOAR funding in bunches, but Whitmer had requested a more regular form of funding in her annual budget proposal, saying it is important to help the state continue to compete for jobs.
Under the new law, the state will fund SOAR using up to $500 million a year in corporate income taxes for fiscal years 2023, 2024 and 2025.
The state will also put $50 million a year in corporate income tax revenue into the Michigan Housing and Community Development Fund, and $50 million into a separate Revitalization and Placemaking Fund.
4. No rebate checks, but a potential income tax rate cut
The legislation Whitmer signed Tuesday calls for an immediate $180 rebate checks for all tax filers, but only if the law takes effect by April 18. And that won’t happen because Senate Republicans denied the bill the ⅔ supermajority needed for immediate effect, meaning it won’t take effect until early 2024.
Republicans did so to preserve a projected income tax rate reduction that could be triggered by a 2015 law that requires the state to cut income taxes if revenue significantly outpaces inflation.
Nonpartisan House and Senate fiscal agencies predict fiscal year 2022 revenue growth will automatically cut the income tax rate from 4.25 percent to as low as 4.04 percent. Finalized revenue numbers that will inform the calculation are expected later this month.
Senate Republicans preferred a permanent income tax cut to Whitmer’s $180 rebate check, according to Sen. Aric Nesbitt, who called the governor’s proposal a “one-time gimmick that disappears in one trip to the grocery store.”
“For weeks, the governor has maneuvered to stop this permanent tax cut from happening and Republicans have stood firm to ensure that all Michiganders finally receive this relief from historic inflation,” Nesbitt, R-Porter Township, said last week.
Democrats who supported the rebate checks argued an income tax rate reduction would most benefit the wealthy. A billionaire could save hundreds of thousands of dollars each year, while a $30,000 earner would only save $68 annually, according to state Rep. Samantha Steckloff, D-Farmington Hills.
That $30,000 earner could eventually save more from a permanent rate reduction than they would from a $180 rebate check, but it would take three years for that to happen.
Before signing the new law Tuesday, Whitmer blasted Republicans for denying immediate relief to taxpayers grappling with the high cost of inflation.
“I would love to be able to say the $180 checks are flying out now so we can give people relief right now,” Whitmer said Tuesday. “But the Republicans in the Legislature… decided not to take action.”