The administration said pass-through business owners could reduce their state tax liability through a state tax credit claimed on their personal income tax returns that is worth 4.25 percent of the business income that was taxed. That effectively means these businesses would pay a state tax increase of 1.75 percent, rather than the full 6 percent, and would also prevent double taxation of their business income.
All pass-through companies also would be able to deduct the first $50,000 of business income from the new state tax, which the administration said also could exclude some of the smallest businesses from paying the higher tax.
The pass-through tax increase is estimated to raise roughly $203 million in total revenue in the 2020 fiscal year that starts Oct. 1, and $280 million in 2021. That revenue is expected to partially offset the revenue lost by unwinding the Snyder-era retirement tax, which is estimated to cost the state close to $355 million in 2021.
Using those estimates, that would mean the state’s general fund would take in $75 million less than under current tax policy.
Whitmer said the business tax is intended to pay for repealing the retirement tax, a promise she made to voters during her campaign. Republican legislators have introduced their own bills to reverse the tax on retirement income, though without identifying a way to recover the lost revenue.
“There’s no question, they’ve got to be able to pay for it,” Whitmer told reporters during a roundtable following her budget rollout this month.
She added that the Snyder administration originally attached the retirement tax to business tax cuts in 2011, a move she opposed as a state senator, and that restoring retirement income tax exemptions would relieve some financial pressure on taxpayers from her proposal to raise the gas tax by 45 cents a gallon over a year.
“This was a legitimate way to make sure that we paid for the relief,” Whitmer added, “but also to ensure that drivers are feeling some relief — our senior citizens in particular.”
The administration’s proposal would begin to restore balance to the state’s tax structure, which leaned heavily on individual taxpayers eight years ago, said Rachel Richards, legislative coordinator for the Michigan League for Public Policy, which advocates for policies to support vulnerable residents.
“We’ve at least started opening the door to a conversation on the adequacy of Michigan’s revenues, as well as taking a look at who’s paying them and whether we are all paying … our fair share,” Richards said. March 22, 2019 – Bridge Magazine