When Michigan lawmakers increased fuel and vehicle registration taxes in 2015, they also pledged to reduce income tax revenue in the future if a certain condition was met. Now it has been met, but Democratic lawmakers are reportedly working to stop the income tax cut for everyone in order to shift hundreds of millions of dollars to big corporations.
Under the 2015 law the income tax rate will drop if state revenue increases above inflation. Some people think that the pandemic messed up these numbers. According to this theory, revenue dropped so severely during Gov. Whitmer’s COVID shutdowns that we are now seeing an artificial spike as the economy returns to normal. This in turn would make the tax reduction larger than intended. Lansing insider newsletter MIRS makes this observation:
Activating this trigger could only happen — realistically — if something cataclysmic happened in FY 2021 . . . and, amazingly, that happened with the COVID-19 fallout. General Fund revenues slowed down. In the years that followed, federal money helped bolster GF revenues to record levels. Viola. (sic)
Except this did not happen.
There was a decrease in revenue due to the pandemic, but that happened in the year before FY 2020-21. The revenue from the fund that triggers an income tax cut decreased from $10.3 billion in fiscal year 2018-19 to $10.0 billion in fiscal year 2019-20. Then it increased to $12.0 billion in fiscal year 2020-21, according to state financial reports.
Any income tax reduction will be based on revenue growth exceeding inflation between the FY 2020-21 and FY 2021-22. Administrators expect that revenue did increase faster than inflation and that an income tax reduction should happen. That reduction, however, will be smaller than if the pandemic really had brought FY 2020-21 revenue down.
MIRS also reports that legislators may be attempting to avoid the income tax reduction by reclassifying revenue away from the general fund and into the state’s selective subsidy funds:
The idea being suggested is to take a large portion of the corporate income tax, for example, and steer it to the [Strategic Outreach and Attraction Reserve] Fund so the final General Fund number reported in the final book closing document (due at the end of March) is too low to activate the trigger.
The catch is that the corporate income tax revenue has already been recorded. Administrators can make adjustments and fix errors before publishing financial statements, but this isn’t an error. It’s a major policy decision to move money, and it is being made well after the fiscal year has ended.
The SOAR fund is a waste of taxpayer dollars. It awards large cash payments to whatever business administrators want. Selective business subsidies are ineffective at creating jobs, unfair to the businesses who don’t get them, and expensive to taxpayers.
We should not want our lawmakers to avoid reducing taxes on everyone so that they can hand out hundreds of millions in checks to the businesses that they favor.
We should want that even less when they have to ignore accounting principles to do it.
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