By Zachary Gorchow
Executive Editor and Publisher
Posted: January 9, 2018 3:33 PM

Governor Rick Snyder has come up with his answer to the federal tax law causing the elimination of the personal exemption for those paying state income tax, a technical change that will enable taxpayers to still claim an exemption for themselves and their dependents.

Michigan law now allows a $4,000 exemption, with the amount rising annually by inflation, rounded to the nearest $100, in effect saving taxpayers $170 each for themselves and their dependents. But the Michigan Income Tax Act says Michigan taxpayers can claim the same number of personal exemptions as they claim on their federal taxes. The end of the federal personal income tax exemption thus also means the end of the Michigan one.

It would mean a $1.4 billion tax increase, or again, $170 more for each taxpayer and dependent.

Well, no one thinks that’s a good idea, and so discussions began on how to remedy the issue.

The Snyder administration’s answer is a technical wording change, which is not yet available in bill form, which would in effect decouple the Michigan personal income tax exemption from the federal one. As an added bonus, the personal exemption would rise to $4,500 by 2021. Had it been up to inflation alone, the exemption probably would have needed more time to get to that level.

So everyone gets to keep their $170 per taxpayer and dependent. All’s well that ends well, right?

Well, while the legislation is simple, the process of getting it to the governor’s desk looms as a big political headache.

First of all, the probability of a legislator offering an amendment seeking a much more substantial increase in the personal exemption seems like at least 100 percent.

The House could avoid an uncomfortable record roll call vote, which became a thing of the past on amendments in that chamber once the majority decided it was tired of the minority party putting its vulnerable members in a tough spot. Now it just gavels down amendments on a voice vote. But the Senate does allow record roll call votes on amendments, and that could make for some interesting theater on the south side of the Capitol.

Republicans love tax cuts, and if there’s one tax cut Democrats prefer, it’s the personal exemption, because increasing it means the same amount of money for every taxpayer, unlike a reduction in the income tax rate.

The advantage of a “simple” fix, as the Snyder administration has called it, is that it requires amending only one section of the Income Tax Act. That’s important because it means any amendments can only affect that section of the act, thus confining the potential for mischief other changes to the bill. A bill that amends more than one section enables legislators to propose amending any portion of the act, and that would turn into a free-for-all.

Democrats could propose increasing the Corporate Income Tax, the tax Mr. Snyder championed to replace the Michigan Business Tax. The CIT, in effect since 2012, raises a small fraction of the revenues the MBT did. While businesses have applauded the new tax as far more reasonable in size and easier to administer than the complicated MBT, it is a pariah among Democrats because most of the revenue loss was made up by wiping out individual income tax credits.

Republicans could take another run at cutting the income tax rate from 4.25 percent to 3.9 percent although the House fell short of the votes necessary to make that change 11 months ago.

There have been proposals to restore some of those lost income tax credits from the 2011 tax changes. Someone could take a swing at reviving one of those.

Oh, and here’s the one that would be the most interesting: the pension tax. The 2011 tax changes extended the income tax to pension income from public sector jobs for the first time and greatly expanded the tax’s application to pension income from private sector jobs, though those born before 1946 were exempted.

In the years since then, when our reporters at Gongwer News Service have interviewed candidates for the House about the pension tax, virtually every one of them, Republican and Democrat, has said they support repealing it. If the House were to vote on pension tax repeal today, it would probably pass unanimously.

If you combine the seven Republican senators who voted against the bill in 2011 who are still in the Senate with all 11 Democrats and the Republican senators eligible for re-election in 2018, that makes well more than the 20 needed to pass something in the Senate. The only reason the pension tax made it through the Legislature in 2011 is it was combined in the same bill with the MBT repeal and Republicans could not afford to embarrass their new governor in his first year in office.

Will legislative Republicans be willing to introduce a simple single-section bill like Mr. Snyder wants and limit the drama (though there would still be plenty of it)? Or will they decide to go for more and open the proverbial political floodgates?