Main points of Snyder’s plan discussed
Holy cow! Governor Synder has really upset the apple cart. Of course, he would argue that the apple cart needed to be upset this time. No one should be too surprised, since he was elected just over three months ago, running on a platform of fixing Michigan’s financial condition. At least he somewhat uniformly upset everyone’s apple cart.
The state of Michigan has been in a tough spot for some time now. The last few years they have used smoke and mirrors to balance the budget. One year it was the cigarette lawsuit settlement. Another year it was a combination of items, including the $250 lifetime trailer license plate fees. Last year it was stimulus money and this year it was stimulus money and the federal “edujobs” dollars. There just aren’t any more rabbits in the hat. Next year was going to be a 1.8 billion dollar deficit problem.
So last Thursday, the governor presented his ideas of how to right the ship. His proposed budget for the October 1, 2011 through September 30, 2012 fiscal year still spends 47 billion dollars. It does cut total spending by 1.2 billion dollars and increases revenues by 1.7 billion dollars. His idea is to flatten out and simplify the tax code. Is this the beginning of a nationwide movement to a flat tax? I would bet there are quite a few states looking at what is going on in Michigan—peacefully going on in Michigan—and waiting to see how it works out. Perhaps our federal government should be paying attention as well.
Let’s go over the main tax points of the governor’s plan. There are a few main provisions and lots of minor provisions. First, corporations will pay tax at a flat 6% tax rate based upon the corporation’s federal taxable income. His bill eliminates the Michigan Business Tax (MBT) in totality. This will free up a whole staff of MBT experts to work somewhere else in the Treasury Department. If not one other simplifying measure was instituted, just getting rid of the diabolical MBT has to cut several hundred or even thousand pages out of the tax code. Good riddens.
Second, the personal income tax rate will drop to 4.25% from the present 4.35% and will remain at that rate for the foreseeable future. It was slated to decrease to 3.9%.
Third, the credit for contributions to homeless shelters, food banks, public universities, public TV, libraries, community foundations, and museums is eliminated.
Fourth, the credit for tax paid to Michigan cities is dropped.
Fifth, exemption amounts will be phased out at $75,000 for singles and $150,000 for joint filers. In addition, the extra $600 exemption for children is gone as well as the $2,300 extra amount for those age 65 and older.
Sixth, the homestead property tax credit is changed. The credit is phased out between the household income amounts of $61,000 and $70,000. All taxpayers will receive 80% of the allowable calculated credit up to a maximum of $1,200. Currently, taxpayers under the age of 65 are allowed 60% of the allowable credit while those ages 65 or older receive 100% of the calculated credit up to $1,200. In the future all qualifying taxpayers will receive 80%.
Seventh, and perhaps the most controversial provision in the whole shebang, the bill eliminates the income tax exemption granted to pensions of all types. Governor Snyder proves that he is an equal opportunity politician. He dares to put himself on everyone’s bad list. Currently, Michigan state and federal pensions are not taxed at all and private pensions are taxed only when they exceed $45,120 for singles and $90,240 for joint filers. All of this previously untaxed income will be taxed at 4.25% and will raise a projected 900 million dollars of revenue.
Eighth, and probably the second most controversial provision eliminates the Michigan Earned Income Tax Credit (EITC). Taxpayers receiving a federal EITC are refunded 20% of that amount on their Michigan return. Elimination of this credit will save approximately 360 million dollars.
There are many other provisions that are not tax provisions but they are important provisions that affect many of us. Cities like Rockford will lose some revenue-sharing money. Cities like Grand Rapids will lose a tremendous amount of revenue-sharing money. All school systems are going to lose about 4% of their funding or $300 per student. They were already slated to lose $170 per student, so now Dr. Shibler and the Board of Education trustees will be dealing with a total loss of $470 per student. Ouch. Perhaps a miracle will occur, but I’m thinking there will be some late nights at the Administration Building. This time of year, I know about that late night stuff. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent. He owns Action Tax Service in Rockford. Contact Jerry at www.actiontaxservice.com.