Feb. 3, 2023 | This Week in Government: Income Tax Rate Drop, Permanency Debated

Ever since the House and Senate fiscal agencies in early January released forecasts that said their preliminary estimates for General Fund revenues in the 2021-22 fiscal year would mean, if verified at book closing, a reduction in the income tax rate of about 0.2 percentage points, Republicans have hammered at Democrats not to do anything preventing that rollback from happening.

But new questions are being raised about whether the mechanics of PA 180 of 2015, something of an afterthought in legislation passed by Republicans and signed by then-Gov. Rick Snyder to raise taxes on fuel and vehicle registration fees for roads, actually will lead to a drop in the income tax rate.

Allies of Gov. Gretchen Whitmer, scrutinizing the statute, also are raising questions about whether such a decline in the rate is permanent or only in effect for the current tax year.

This comes amid sources saying Whitmer and Democrats are considering diverting $800 million in income tax revenues that would have gone to the General Fund instead to the Strategic Outreach and Attraction Reserve Fund, a move that would likely prevent the General Fund revenue threshold from being hit. Whitmer and her staff have not publicly confirmed those reports, saying only that the numbers have to be analyzed for book-closing.

The 2015 statute, using a complex formula, essentially said that starting in 2023, if revenues to the General Fund exceeded inflation and an additional amount to account for economic growth, the 4.25% individual income tax rate would fall by an amount tied to the size of the exceedance. The state has yet to close the books on the 2021-22 fiscal year, but preliminary numbers indicate revenue growth to the General Fund topped the threshold to trigger an income tax reduction by about $720 million.

A rollback in the rate by law cannot happen until after the state closes its books and publishes its Comprehensive Annual Financial Report. The statute is vague about the mechanics of the decision but says it is a determination made by Treasurer Rachael Eubanks, House Fiscal Agency Director Mary Ann Cleary, and Senate Fiscal Agency Director Kathryn Summers.

Steven Liedel, a former chief legal counsel to Gov. Jennifer Granholm, now with the Dykema firm, said his analysis of the statute indicates if, in fact the financial report shows the threshold exceeded to trigger a reduction in the rate, it is only for the 2023 tax year.

He pointed to Section 51(1)(b) of the statute that says “except as otherwise provided under subdivision (c)” starting October 1, 2012, the state’s income tax rate is 4.25%.

Subdivision (c) then says, “for each tax year beginning on and after January 1, 2023,” the formula will be applied to determine whether “the current rate” must be reduced. Liedel said the structure of the statute clearly makes 4.25% the default rate each year unless the revenue threshold is exceeded.

“Folks involved in the process may have seemed to think they were creating a permanent rollback trigger. But I don’t think the words they enacted do that,” he said. “Instead of using language that would be more typical and is used in other parts of the tax law, they used the phrase ‘for each tax year beginning on and after January 1, 2023,’ as opposed to ‘tax years beginning after.’ … I don’t see any way in which you can be faithful to the plain language of the statute as written and say it’s a lower number every year because the language would have been written differently.”

Cleary and Summers, while cautioning they are fiscal analysts, not attorneys, said their analysis is the rate reduction would be permanent, and they are factoring that into their multiyear balance sheets.

“We are all in agreement that it is a permanent rollback,” Cleary said of HFA staff.

Said Summers, asked about the analysis of the rollback could be temporary: “In our published balance sheet, I have reductions to revenues in FY ’23 and FY ’24, but I could be wrong. That’s a new angle. We could certainly be wrong.”

As of now, the HFA continues to project the rate would fall to 4.05% based on the revenue and inflation numbers and running the formula. The SFA, which in early January projected a new rate of 4.04%, now is showing a fall to 4.055%.

“Literally a swing of a couple of million dollars would either push it up to 4.06 or push it down to 4.05,” said David Zin, the SFA’s chief economist.

Bob Schneider, senior research associate for the Citizens Research Council of Michigan, said the “generally accepted answer” to the question of whether the income tax rate if the trigger forces it to fall below 4.25%, would then return to 4.25% for the tax year 2024 is “no, the rate cut would be permanent.” He pointed to a 2015 HFA analysis that said the reduction would be “permanent.”

“However, having just looked again at the statutory language, I guess I can see how someone could argue the text of the law calls for an annual determination on whether the ‘trigger’ is implemented,” he said. “And that if it’s not (which is probably the case next year), then the default would be to go back to 4.25%. I don’t see anything that explicitly says that either the reduced rate or the original 4.25% becomes the new default rate for future years.”

There is another factor that has somewhat been brushed aside in the mini-frenzy surrounding whether the income tax rollback will be triggered.

Book-closings can be messy, and revenue forecasts, like the one at the January Consensus Revenue Estimating Conference, can turn out incorrect during the accounting and reconciling process.

Zin recalled in the mid-2010s that the book-closing caused a $400 million upswing beyond the forecast in revenues because of lower-than-anticipated Michigan Business Tax credit claims. He recalled that then-SFA Director Ellen Jeffries was stunned. That kind of data is not available to the fiscal agencies and solely within the Department of Treasury’s control.

Cleary recalled that situation as well.

“It’s all accounting, payables, bookkeeping and expenditures, and so we’re not part of that process,” she said. “I think that’s why we’re all nervous saying it’s official because we’ve had a surprise before.”

Senate Minority Leader Aric Nesbitt (R-Porter Township) told reporters Thursday the tax cut under the 2015 law is a reasonable policy.

The senator questioned the logic behind the proposals the governor and Democratic leadership have been discussing.

“I don’t quite understand why the governor doesn’t just take a win and say she’s going to continue to cut taxes, whether it’s through the EITC or … the pension exemptions that she’s trying to push,” Nesbitt said. “Let’s come together and let’s figure out a deal on cutting taxes for all working Michiganders.”

The senator said instead of beginning private discussions on a complex plan among leadership and the governor, the Legislature could have finished the EITC bill, begun working on figuring out a funding formula for the SOAR fund as well as negotiated further on a retirement tax plan that would impact more people than those with public pensions.

“There’s a lot of concerns that I have, not just some of the policies but also the process,” Nesbitt said.

The head of the Michigan Economic Development Corporation told the House Appropriations Committee on Wednesday that investing in the Strategic Outreach and Attraction Reserve fund is critical for Michigan’s future in the auto and clean energy industries, but Republicans questioned whether the process for distributing SOAR funds was being followed as intended. MEDC President and Chief Executive Officer Quentin Messer said legislative oversight remains in place.

“I want to emphasize that the money can only be expended through the legislative transfer process,” Messer said. “This committee, as well as your counterparts in the Senate, will always evaluate any deposit that goes into the SOAR fund.”

Republicans also pressed Messer on what several news outlets, including Gongwer News Service, citing unnamed sources, have said are discussions about a one-time $800 million allocation to SOAR plus annual $500 million allocations to provide a stable funding source. That has the potential to prevent an automatic cut in the income tax rate from 4.25% to 4.05%.

Some Democratic members also questioned whether providing large tax breaks to corporations was the best way to attract businesses.

“We should be thinking about this as an ‘and’ and not an ‘or’,” Messer said. “This is all about trying to make sure that we can capture as much payroll, increase our state sales tax and other revenue. … We are dealing with an 18 to 30 months window, because so many companies, whether they be in mobility or semiconductor or clean energy or other sectors, are already going to have deployed their capital. The game will already be over, and they they’ll play themselves out over the next 10 to 15 years.”

Rep. Bill Schuette (R-Midland) and Rep. Phil Green (R-Watertown Township) also asked if cutting the state’s income tax rate could help attract business to the state. An income tax rate cut could occur later this year under a 2015 law that states if General Fund revenues rise by enough, the income tax rate falls. The House and Senate fiscal agencies have said the rate could fall from 4.25% to 4.05% as a result of the revenue surge.

Both representatives were gaveled down by House Appropriations Chair Rep. Angela Witwer (D-Delta Township), who said their questions were better suited for budget officials and not Messer on behalf of the MEDC.

Messer emphasized that all funds distributed from the SOAR fund have provisions in place to take back the money if companies don’t perform.

The Michigan Strategic Fund ultimately makes decisions about how tax dollars will be spent for economic development, Messer said. The Strategic Fund is governed by an 11-person committee consisting of one person appointed by the House speaker, one appointed by the Senate majority leader, and the rest appointed by the governor. The Michigan Economic Development Corporation can only make recommendations to the Michigan Strategic Fund.

Once a recommendation is approved by the Michigan Strategic Fund, it enters into the SOAR process.

“The SOAR process ensures that we have a partnership with our legislative buy-in,” Messer said. “Once a recommendation is approved … we then come back and this committee, as well as your Senate counterpart appropriations committee, which makes the evaluation of whether that SOAR deposit will be made. And this body at that particular time will receive the opportunity to raise and ask a number of questions.”

The next step is for the MEDC to prepare answers for the Appropriations committees. Once members are satisfied, the committees decide whether to distribute the funds from SOAR.

The goal of the SOAR fund was to make sure that Michigan remains on the cutting edge of the auto industry with the production of mobility semiconductors and clean energy technologies, Messer said, and – based on Michigan’s current share of the EV production market – over 300,000 jobs are at stake.

“We are indeed in intense competition across North America. Not just the 49 U.S. states, but Canadian provinces and Mexican cities,” he said. “There is a reason why states with personal income tax and states without personal income tax try to secure these types of opportunities. They know what we have lived for the last 115 years. The fact is that these are uniquely rich and robust industries.”

The SOAR fund is critical to securing those opportunities and keeping Michigan competitive, Messer said.

“The time is now,” Messer said. “We are on this journey to greatness. SOAR has had a tremendous impact, secured private commitments of over $13 billion. Jobs created and retained, almost 13,000.”

The key components of a SOAR agreement are that disbursements are only made when eligible expenses occur, the repayment process will be triggered if a company fails to meet job creation or investment commitments, and that legislative approval is needed before the contract with the company is finalized, Messer said.

The SOAR fund also has two subcomponents, the critical industry program, and the strategic site readiness program.

Awards from the site readiness program are made to local economic development organizations and local governments to support site infrastructure. The strategic site readiness program exists to make sure that there are locations in Michigan prepared for big projects.

Several Republican lawmakers expressed concern that the Legislature may be able to allocate money directly into the critical industry program or the strategic site readiness program and bypass the Appropriations committee process set up for the SOAR fund, which would make the disbursement of taxpayer dollars to corporations less transparent.

Messer said that the process, in its current iteration, requires the Legislature to approve SOAR funds to be deposited into a fund. The MEDC can then make recommendations to draw against the SOAR fund, and each of those projects will have to come before the Appropriations committees to be approved.

“The process as it is being proposed to us, as we understand it right now, circumvents that entire process. We’re not for that,” said Rep. Sarah Lightner (R-Springport), the committee’s minority vice chair.

She said that Gov. Gretchen Whitmer and House Democratic leadership were trying to use SOAR funds to avoid an automatic income tax rate cut, adding that it undermined key accountability procedures that were originally established for SOAR.

“Instead of delivering on the tax cut that Michigan taxpayers were promised, Gov. Whitmer is secretly shifting money around to set more money aside for large corporations,” she said in a statement. “The governor promised to deliver relief to Michigan families, seniors and working people. … Now she’s backpedaling on that promise so she can give away their hard-earned dollars to corporate welfare projects that benefit a select few.”

Focusing on education and employment opportunities for incarcerated people helps decrease recidivism rates, research shows.

A recent study conducted by the Political Economy Research Institute at Middle Tennessee State University found that prison workforce and education programs reduce the likelihood of recidivism by 14.8%. The study also found that former offenders who have gone through the programs have a 6.9% increase in the likelihood of employment and earn an extra $131 per quarter.

The Mackinac Center for Public Policy recently released a summary of the research.

“This research makes clear that investment in prison-based education and workforce training programs produces both safer communities and positive economic returns,” David Guenthner, vice president for government affairs at the Mackinac Center, said in a statement. “We all benefit from having more ex-offenders equipped to earn their success in the workforce.”

The Mackinac Center also noted the high cost of incarceration in a news release on the research, saying that nationally, taxpayers spend an estimated $182 billion a year to house prisoners, pay police, and provide for courts, health care, and other expenses.

Compared nationally, Michigan ranks fourth in the United States for low recidivism rates at 23.6%, according to a report from the Citizens Research Council of Michigan. That means 23.6% of prisoners released in Michigan returned to prison within three years and is based on data from the Department of Corrections. The state’s return-to-prison rate has been declining during the last few decades since a peak in 1998 when it was at 45.7%.

The Research Council report notes that the likelihood of rearrest is subject to variables by demographics like race, sex, and age at initial arrest, with young men of color being the most likely to be rearrested and reincarcerated. A greater percentage of prisoners who were Black returned to prison at the end of a 10-year period than prisoners who were white, at 63% compared to 59%. According to the report, age is a more significant factor, with those arrested before the age of 40 more likely to return to prison than those over 40. The type of crime, the number of prior arrests before incarceration, and the time served also affect recidivism rates.

Returning to the same economic conditions that existed prior to a person’s arrest also increases the chances of re-incarceration. The Research Council report states that the MDOC’s Vocational Village program, which allows prisoners to receive career and technical education programming, has helped people find and keep jobs after incarceration. The return-to-prison rate for people in the Vocational Village program was 9% as of December 2021. Corrections data shows that prisoners who enroll in a vocational program are more than twice as likely to be employed.

Given the success of the program, the report suggests it be expanded. Guenthner with the Mackinac Center agreed.

“Even in more forward-thinking states like Michigan, only a minuscule percentage of the inmates release back into society have access to these programs,” he said in a statement. “We will work with our research team and policymakers to lay out a path to substantially expanding these programs.”

The Research Council recommends Michigan go a step further to reduce recidivism by expanding educational and vocational programs for offenders and providing tax incentives for employers who hire people with criminal records. Additionally, the report recommends the state focus on the underlying issues that increase the likelihood of incarceration in the first place by increasing school funding, expanding access to subsidies, encouraging anti-discrimination efforts, and providing substance abuse services.

“Recidivism … should be seen as a collective failure more than an individual one, and one that requires collective solutions,” the report says. “The state and local units of government spend a significant amount of money on law enforcement and corrections, but much of that spending is for naught if people leaving prison are not put on a path to better economic opportunity, primarily through education and employment opportunities.”

Supporters of a bill that would put language in statute to ban discrimination based on sexual orientation and gender identity told senators Thursday that providing specific protections in the law for LGBTQ persons would provide peace of mind and show Michigan to be a welcoming place.

Testimony only was taken Thursday by the Senate Civil Rights, Judiciary, and Public Safety Committee on SB 4, mostly heard from supporters calling the proposed changes long overdue. Further testimony is expected at another hearing next week, where the bill might see action. Expanding ELCRA has broad support from the business community and advocates. A majority of Democratic lawmakers have been pushing for the change for more than a decade, sometimes joined by a few Republicans, but never enough to get it real traction under the former GOP majorities in the House and Senate.

Given the new Democratic majorities in the Legislature, the issue finally appears poised to become law.

While there was some opposition during Thursday’s hearing – Democrats on the committee did push back on testimony from two individuals – the hearing mostly included supporters. The American Civil Liberties Union of Michigan, Equality Michigan, and Donna Stephens, the wife of the late Aimee Stephens, a transgender woman from Ferndale whose workplace discrimination case was taken up by the U.S. Supreme Court, were among those outlining support to the panel.

As introduced, SB 4 would amend the Elliott-Larsen Civil Rights Act. The bill would codify court rulings that the act’s prohibition on discrimination on the basis of sex includes sexual orientation and gender identity (See Gongwer Michigan Report, July 28, 2022).

Sen. Jeremy Moss (D-Southfield) outlined the history of the ELCRA and how since the initial hearings on the act in 1973 advocates for the LGBTQ community have sought to include their community without success.

“While this is a document of my values as a gay person, I also believe this is a document of Michigan values to have decency, of kindness and of respect towards one another,” Moss said.

Few committee hearings have ever been held on providing LGBT protections in the act, one of the earliest being 1983. The issue also received a hearing in 2014 and, before that, in 2009. In 2009, Democrats controlled the House and the governor’s office.

Moss said former Republican Rep. Jim Dressel introduced a bill that was reported but was then sent back to committee and died.

Dressel was defeated in his primary election in 1984 and fought for LGBTQ rights until his death from AIDS-related pneumonia in 1992.

“This hearing should be dedicated to him and the countless advocates over many years upon whose shoulders we stand,” Moss said.

He added that it is “quite a journey” over the decades from the LGBTQ community having few supporters to state and federal court decisions on LGBTQ rights and against discrimination.

“We’re not asking for anything more than anyone else has, but we’re also not going to accept anything less than equal protection under the law,” Moss said.

Rep. Jason Hoskins (D-Southfield) echoed the senator’s remarks on progress and urged action on the bill.

“We are standing here at the precipice of completing the great work that we started in 1973,” Hoskins said.

He said the bill would provide needed security for members of the LGBTQ community and also ensure the state is a more inclusive place. Hoskins also pointed to the impact on businesses and the economy, saying it would help in attracting an educated and diverse workforce.

“We want Michigan to be competitive and relevant in this economy,” Hoskins said. “We have to offer the LGBTQ community a measure of security and peace of mind in knowing that they are protected from discrimination in the workplace, in their homes and in public spaces.”

Two Potterville residents, Libby Ranshaw and Katherine Bussard spoke in opposition.

Ranshaw spoke about being a sexual assault survivor and expressed concerns about protections for a transgender woman if she were attacked in a restroom or for her granddaughter in a locker room if there were a transgender person in the locker room. She requested there be an amendment to address her concerns.

For Bussard, she expressed concerns over language referencing the prohibitions based on “sexual orientation, gender identity or expression,” focusing specifically on the use of “expression.”

“If all it takes is a verbal expression of something to say today, I express myself as feeling a gender other than what I’m born biologically, and I exploit that to have any intent of going into a place I normally wouldn’t, I could potentially endanger others or make others uncomfortable or feel unsafe,” Bussard said.

Bussard listed places including restrooms, locker rooms and domestic violence shelters as places where the bill could have a negative impact, urging changes to the bill to protect all people.

Democrats quickly pushed back on the testimony of Ranshaw and Bussard.

Committee Chair Sen. Stephanie Chang (D-Detroit) said the issues of public safety and sexual assault are among those the committee would be looking at this term.

“I am horrified that you would bring those issues together in conversation about this bill,” Chang added.

The senator asked whether either of the two had any data to back their claims. Ranshaw had nothing in front of her but cited media reports in Virginia of a transgender teenager sexually assaulting another student in a school restroom.

Sen. Jeff Irwin (D-Ann Arbor) pointed to state criminal statutes outlining sexual assault, adding SB 4 would not change that.

Irwin asked the two for suggestions on how to have language to check someone for their gender identity, pointing to the current law in which it is illegal to fire someone over their religious beliefs.

To this, Bussard suggested some form of documentation would be helpful and put people at ease.

“There’s a difference I think in the minds of many women between someone who has gone through the process of making some physical changes to manifest what they feel inside, outside, to where you’re no longer as much of a physical threat to another biological female,” Bussard said.

Irwin fired back, calling the argument offensive.

“The idea that we should meter someone’s freedoms and rights based on whether or not they visually meet some sort of qualifications that you’ve established is just not how we do things in the United States of America,” Irwin said. “I see a lot of Christians who claim to be Christians but who act in a very bigoted and prejudiced ways all the time and it’s not my right to tell them they’re not Christian and tell them how to read their Bible.”

Sen. Jim Runestad (R-White Lake) said he wished the majority on the committee would have respected the two women’s testimony more, adding that to him, their concerns appeared to be legitimate.

“What I’ve found being on the Judiciary Committee for eight years is that more than any other committee that if you get it wrong it impacts people on a very individual basis.” Runestad said. “I’ve seen over and over there was an emotional issue and it blasted through and then we had to go back and say: ‘oh geez, we didn’t think of that.’”

Runestad said his hope is that possible amendments to address the two women’s concerns might be considered before final passage.

Urging support for SB 4 was Civil Rights Commission

Luke Londo (I-Hazel Park). He outlined how the 2018 interpretive statement from the commission stated that discrimination on the basis of sex encompassed sexual orientation and gender identity. It led to last year’s ELCRA ruling by the Michigan Supreme Court. Londo, the first openly LGBTQ member of the commission, told senators the bill would help prevent young people from leaving the state for better opportunities in more inclusive places.

“The greatest safeguard of civil rights, equal opportunities and privileges afforded to other Michigan citizens can only be assured for the LGBTQ community by conscious and deliberate legislative action,” Londo said.

Others who spoke in support of the bill included the mother of a transgender daughter and a Detroit Police Department officer who serves as the department’s LGBTQ liaison.

MDVA: New Selfridge Fighter Mission Critical to Economy, Security

The director of the Department of Military and Veterans Affairs told a Senate panel that having a new fighter mission assigned to Selfridge Air National Guard Base is critical for both the local economy and national security.

Members of the Senate Veterans and Emergency Services Committee discussed the base and efforts to maintain a new fighter mission during a presentation Wednesday from Military and Veterans Affairs Director Paul Rogers. He provided committee members an overview of the Michigan Department of Military and Veterans Affairs.Gov. Gretchen Whitmer‘s administration, the department, and members of the state’s congressional delegation have been pushing for President Joe Biden to assign a new fighter mission to Selfridge.

Last month, Whitmer sent a letter to the president asking for a new fighter mission to be assigned to the base, adding that she has committed the state to spend $100 million on base improvements to put it in a position to take up a new mission.

“We are working very closely through the governor’s office with the federal delegation, with the senior leadership in the Air Force and U.S. Department of Defense to find a replacement fighter mission for the A-10,” Rogers said. “The A-10 squadron alone is 611 jobs. If that squadron goes away without some kind of replacement, those loss of jobs account for about $45 million per year to that local economy.”

Rogers said the fighter mission is important to those jobs and the local economy and national security interests. He said local and state elected officials are also supportive of backing a new mission.

“We are putting a full-court press on the Air Force to identify a replacement mission before the retirement of the A-10s,” Rogers said.

Sen. Veronica Klinefelt (D-Eastpointe) asked Rogers about being able to compete in its efforts to promote Selfridge compared to several eastern and southern states where there are large military bases and high levels of spending to push and promote military sites.

“What we’re hearing on our end is it’s the hard sell to the government … that we’re falling a little bit short in Michigan,” Klinefielt said. “Other states are investing a significant amount of money in the actual process of getting their attention.”

Klinefielt said further discussions on how to get the federal government’s attention will be necessary.

“Michigan is a National Guard state,” Rogers said, pointing to how nearly all of Michigan’s active duty bases were shuttered in recent decades.

He said another hurdle is, until the last couple of years, having a relative lack of organization in promoting military, aerospace, and defense spending.

Rogers also said there is now strong unity between the congressional delegation, the governor’s administration, and local officials on protecting the mission at Selfridge.

“It’s starting to turn the attention of DOD back to Michigan, but that is a requirement that we stay on that,” Rogers said.