March 31, 2023 | This Week in Government: Income Tax Drops to 4.05%

After months of Democratic officials remaining mum on the potential for an income tax cut due to a trigger law inserted in the 2015 road funding plan, Treasurer Rachael Eubanks announced Wednesday evening that the rate will indeed drop to 4.05% for one year.

The announcement came after Attorney General Dana Nessel said in a formal opinion any income tax rate reduction would be temporary under a 2015 law that triggers a reduction based on revenue growth (See Gongwer Michigan Report, March 28, 2023).

It marks a key moment in the tax cut fights that have consumed Lansing for many months. There were Democratic attempts floated to shift money from the 2021-22 fiscal year so the trigger would not be activated and the income tax rate would remain unchanged. The key proposal was a rebate plan Democratic leadership included in a bill that expanded the Earned Income Tax Credit and reduced retirement taxes. However, without Republican support, that proposal did not receive immediate effect, and the revenues could not be shifted.

Republicans voted against the tax cuts because the bill included $800 million to fund $180 rebate checks per taxpayer – $90 each for married couples – a move that has shifted the revenue in the 2021-22 fiscal year and avoided the income tax cut.

Nessel’s opinion reduced the tax cut’s impact by asserting it wouldn’t be permanent and would last for one year only before being reevaluated each year.

“Michigan’s strong economic position has led to a reduction in the state income tax from 4.25% to 4.05% for 2023,” Eubanks said in a statement. “When Michiganders file their 2023 state income taxes in 2024, they will see the rate adjustment in the form of less tax owed or a larger refund.”?

The 2022 Annual Comprehensive Financial Report was issued this evening, a step in officially closing of the fiscal year’s books. The tax cut will save the average taxpayer $50, officials said, and cost the state $650 million.

Treasury said in the statement that taxpayers will see a larger refund or owe less in taxes when they file for 2023 next year. The formal step of reaching the consensus on revenues will happen at the May revenue conference.

Whitmer, in a statement, said the tax cut is in response to a growing economy and strong fiscal management.

“Our state is headed in the right direction, bolstered by low unemployment, projects bringing jobs and supply chains home, and fiscally responsible, bipartisan leadership that took us from a projected $3.5 billion deficit in 2020 to a $9.2 billion surplus this year, paid down $14 billion in debt, and brought the rainy-day fund to an all-time high,” she said in a statement. “This year, we permanently rolled back the retirement tax on our seniors, quintupled the Working Families Tax Credit for 700,000 families, and now, everyone’s income tax will decrease for a year. In total, we have put $1.6 billion in tax relief back in people’s pockets without cutting any critical services or programs.”

With Nessel’s opinion released Tuesday, Republicans were adamant the tax cut language negotiated in 2015 as part of a road funding proposal, an effort to ease the GOP votes on increasing gas taxes and registration fees, intended for the tax cut to be permanent.

“When we crafted this deal in 2015, it was clear to everyone involved that the income tax cut trigger would create a permanent tax cut, should it be activated,” former House Speaker Kevin Cotter said in a statement. “Fiscal analysts, legislative legal counsel, as well as legislators and staff alike, all understood what was enacted. It’s disappointing the attorney general has decided to ignore that and play partisan games at the expense of Michigan workers.”

Still, House Minority Leader Matt Hall (R-Richland Township) praised the tax cut for individuals and small businesses.

“Despite efforts from the governor and her allies to block crucial tax relief for every single working family and small business in Michigan, the income tax rollback will happen this year,” he said in a statement. “This is a major win for Republicans, and a major win for Michigan taxpayers. With the state government sitting on billions of unused surplus funds, we have a responsibility to help people make ends meet and provide real, meaningful relief. House Republicans will celebrate this milestone and continue fighting every day to make this income tax relief permanent as it was intended to be, even if the governor and House Democrats continue to stand in the way.”

The Michigan Strategic Fund Board voted Tuesday to approve site preparation funds for a local economic development group to prepare a proposed multi-billion-dollar Ford Motor Company electric vehicle battery plant in Marshall.

Before the board was a resolution from the Marshall Area Economic Development Alliance for approval of a $120.3 million Strategic Site Readiness Program performance-based grant through the Strategic Outreach and Attraction Reserve Fund. The proposed grant would be for land acquisition and infrastructure development at the site.

In a briefing memo outlining the request, it was pointed out that the Legislature passed a supplemental appropriations package that included $170.3 million for the SOAR Fund. The funding being requested Tuesday would come from these monies.

The briefing memo also explained that Ford has been seeking shovel-ready sites for its new facility.

“As the state pursues business attraction and expansion opportunities, there continues to be a need for large, project ready sites,” the briefing memo says. “Prospective companies and consultants select sites based on availability of shovel ready sites, among other factors. The ability to undertake land acquisition and site and infrastructure development activities is critical to stay competitive and ultimately secure Ford’s expansion project and other new developments.”

Ford is planning to build a $3.5 billion electric battery cell manufacturing facility in Calhoun County. The site preparation is for the proposed facility.

Michigan Economic Development Corporation CEO Quentin Messer Jr. told reporters the funds for MAEDA “will support land acquisition, site development, water and wastewater upgrades, professional fees, administration and other necessary public infrastructure investment.”

He said the funds will enable MAEDA to begin site preparation work for the Ford plant.

“These kinds of activities are a critical component of our state’s overall strategy to develop more investment-ready sites to attract and retain generational projects that will create good-paying jobs and provide greater opportunities for local small businesses, schools and communities,” Messer said. “I look forward to seeing this global opportunity continue coming to life here in Michigan.”

The state last month approved more than $1 billion in incentives for the proposed plant (See Gongwer Michigan Report, Feb.13, 2023).

The appropriations committees in both chambers are required to give final approval for SOAR monies to be released.

Jim Durian, chief executive officer of the Marshall Area Economic Development Alliance, in a statement, praised the vote to approve the incentives.

“This exciting project will have a positive impact on our area for generations to come by creating thousands of jobs at the facility as well as other opportunities related to its construction and spinoff investments,” Durian said. “This development will also create a new, long-lasting talent pipeline, allowing local young people to stay in the region, put down roots and rise their own families.”

Some Republican lawmakers have expressed concerns over the project, including its cost as it relates to incentives and the potential for it delivering any major return on investment by the state.

Several Republican House members have sought to halt the project over concerns they have expressed over the involvement of the Chinese company Contemporary Amperex Technology Co. Ltd. (See Gongwer Michigan Report, Feb. 17, 2023).

Officials with Ford have said the CATL will be a technical service provider and the project will be owned, operated, and run by a subsidiary of Ford, and that the relationship with the company will not be a partnership or a joint venture.

During public comment Tuesday, several Marshall and other area residents echoed GOP concerns about China and made allegations about the company having ties to the Chinese Communist Party.

Comments from Marshall residents in opposition Tuesday largely centered on concerns over pollution, loss of historic farmlands, and transparency.

Victoria McGuffin, a chemistry professor at Michigan State University, spoke about Kalamazoo River watershed concerns, saying 2.5 miles of coastline is involved near the Ford site.

“The soil in this area is excellent, it has a lot of organic matter and not very much clay, which makes it excellent for farming but a very poor place to site an industrial manufacturing site, because of the high permeability of the soil,” McGuffin said.

McGuffin called siting the plant in the proposed location environmentally irresponsible, adding that there are other viable sites in Marshall Township in which the environmental risk would be reduced.

Rebecca Glotfelty, co-founder of Real People Media in Calumet, told the board that Marshall is her hometown and that family members were among those who sold property for the proposed site.

“The process has not been transparent, to say the least,” Glotfelty said, adding she too believed the proposed site was not feasible.

Richard Lindsey with MAEDA disputed the comments of opponents of the project during public comment.

“There’s been an extensive planning process that goes back over 40 years with … these properties,” Lindsey said.

He said this includes inclusion in a City of Marshall master plan in which there were hearings without public comment. Lindsey said there was no public comment until the Ford project was announced.

Lindsey added that the property has been positioned for a potential industrial site since the 1960s. He added that there was no forcing landowners to sell their land for the proposed site.

“It’s been anticipated that it could be used for an industrial project for many, many years,” Lindsey said.

In the first three months of the new legislative session, the Democratic majority has raced through its initial six priorities laid out at the beginning of the term. As lawmakers prepare to dive back in after the spring recess, one issue that could be taken up is no-fault auto insurance.

“The energy and the desire … to take up the issue is there,” said Rep. Brenda Carter (D-Pontiac), who chairs the House Insurance and Financial Services Committee. “After we get through these first six bills and the gun legislation bills, then auto no fault becomes the priority.”

How fast those changes could take place also is complicated by current litigation over the implementation of the 2019 overhaul in the Michigan Supreme Court case, Andary v. USAA Casualty Insurance Company.

Changes were made to Michigan’s no-fault auto insurance in 2019 with the passage of bipartisan legislation that created multiple levels of personal injury protection coverage to make it more affordable. The multi-tiered PIP rate was created as an alternative to the mandatory lifetime health coverage (See Gongwer Michigan Report, June 30, 2020). The legislation also mandated medical fee schedule that imposed a 45% provider rate cut and limited reimbursement for family-provided attendant care to 56 hours per week (See Gongwer Michigan Report, May 12, 2021).

Current Senate Majority Leader Winnie Brinks (D-Grand Rapids) voted no on the auto insurance changes in 2019. Now House Speaker Joe Tate (D-Detroit) voted yes.

“The impact has been devastating,” said Todd Judd, executive director of Michigan Brain Injury Provider Council, a trade association that serves providers in professions related to brain injury rehabilitation, and which has strongly objected to the reforms.

The fee schedule went into effect in July 2021, causing problems for the approximately 17,000 people receiving care under the prior no-fault law, which assured unlimited coverage for “all reasonable charges” needed to provide care for those catastrophically injured. Providers also said they could no longer afford to provide care for patients due to a lack of funds.

“We warned legislators about this before the fee-cap system was implemented in 2020, and everybody kind of took a wait and see approach,” Judd said. “Well, we’ve seen the impact.”

Erin McDonough, executive director of Insurance Alliance of Michigan, said that the reforms have benefited Michigan drivers.

“The goal of them was to drive down costs for Michigan’s 7.2 million drivers, and we think the reforms are working,” she said.

The Department of Insurance and Financial Services released a report showing that as a result of the new law, the Michigan Catastrophic Claims Association deficit of approximately $2 billion had been eliminated and the associations assessment could be reduced by $1 billion. The MCCA also stated the changes resulted in an estimated $3.5 billion reduction in liabilities.

The report also said that, as of Dec. 29, 2022, the department reviewed 47% of the personal auto insurance filings, and those filings reflected $106 million in savings passed on to consumers as the result of the application of the fee schedule provided by the no-fault reforms.

“They’ve kept costs in check by preventing overcharging and reducing incentives for medical providers to push harmful procedures and have established a reasonable reimbursement rate for medical services,” McDonough said.

The state also developed a hotline to ensure that fees were being paid in a timely manner, McDonough said, and people who didn’t have care insurance before the reforms are now buying that protection.

“We have a choice,” she said. “We have savings in the form of a fee schedule. We have accountability through programs like utilization review that allow third party disputes to be overseen by the department. We’ve had 60 new companies enter the market since the reforms passed.”

Last month, the Coalition Protecting Auto No-Fault called into question the accuracy of the number of new insurance companies since the law changes (See Gongwer Michigan Report, Feb. 13, 2023).

The Michigan Supreme Court is currently hearing a case related to the fee schedule. The case, Andary v. USAA Casualty Insurance Company (MSC Docket No. 164772), will decide whether the 2019 changes apply retroactively (See Gongwer Michigan Report, March 2, 2023).

Judd said that the decision of the Supreme Court won’t prevent the Legislature from addressing the reimbursement system.

“It’s a very narrow, small part of the law that really needs to be fixed so that people can get the care that they deserve and that they paid for,” he said. “That’s a legislative caused problem, and the only solution has to come from the Legislature with an amendment to the law that makes sure that providers are getting paid a reasonable amount.”

McDonough said that any discussions about no-fault reforms were dependent on the court case.

“We need to understand what decision the Supreme Court is going to make,” she said. “It will determine constitutionally what the Legislature can and can’t do, and what’s at the heart of this is the medical fee schedule.”

Carter said she is in ongoing discussions with House Speaker Joe Tate‘s (D-Detroit) office about bringing the insurance industry and the provider industry to the table to develop solutions to auto no-fault insurance.

“I’m really optimistic, especially with the subject matter experts we have on the committee, that we will come to some kind of resolution where both sides of the industry wins,” she said.

The biggest concerns to address are the fee schedule and the cut in fees paid to providers, Carter said.

“That’s the 800-pound gorilla in the room for both sides,” she said. “We’ve watched this law since 2019-20, and we see that there’s been a reduction in claims and a reduction in price, however the provider industry is being disproportionately impacted.”

Judd said that when the no-fault auto insurance laws were originally passed, stakeholders like the Michigan Brain Injury Provider Council would have liked an opportunity to discuss what the fee schedule looked like and different strategies to reasonably lower costs in the system.

“We did not get that opportunity,” he said. “We need to see a change to the reimbursement level for post-acute services. Those services that have had their reimbursement rate slashed by 50%. That’s not sustainable…We’re not looking to touch any other aspect of the law except for this one very narrow solution that looks for justice and fairness in terms of making sure that people who are injured have care providers that are getting paid at reasonable rates.”

Judd said he’s cautiously optimistic about the chance of reform.

“We think that we have champions at key points in the Legislature, within leadership and within both parties who have been championing for a change, and the new legislators coming into this session have really shown some great insight into this issue, and they recognize the need,” he said. “We know that over the past few years, Governor Whitmer has said she wants to see some solutions to her desk, and so we’re very hopeful and optimistic now that she has her party with the majority that a solution will get to her desk.”

McDonough said that the medical fee schedule is helping keep costs in check because it allowed providers to charge people with no-fault insurance more for procedures than they charged people without no-fault insurance.

“Loading costs into the system makes rates go up, and when you have choice, unchecked medical costs can prevent people from getting the value of their policy,” she said. “Think about it: You could only afford a $50,000 policy. Why should you have to by a $5,000 MRI when it costs everybody else $500?”

Carter also said that the Legislature was not prevented from making adjustments going forward, regardless of the Supreme Court decision.

“We will still have to look at how the law impact pricing going forward,” she said. “The obligations that the provider industry will have to meet going forward. And that, once again, is a discussion between the two sides.”

Sen. Mark Huizenga (R-Walker) was less confident about the ability of the Legislature to do anything prior to the Supreme Court’s decision. Huizenga is the minority vice chair of the Senate Insurance and Finance Committee.

“In general, any time you have major policy change like that, it’s never perfect, and it’s not that uncommon to see technical fixes, legislative adjustments and modifications after the fact,” he said. “But I think that’s all on hold now, just because of litigation.”

Huizenga said that his office still regularly is contacted by people with concerns about auto no-fault. Still, he said he couldn’t speculate on whether the Senate committee would take it up as an issue or what kind of changes could be considered.

“I don’t think it’d be fair for anyone to speculate as to what changes might or might not occur because of the litigation,” he said.

The Republican caucus largely supports the 2019 law because many members feel that the changes made the state more competitive by lowering prices and made Michigan safer. The biggest priority is making sure that people are getting their medically necessary care.

There hasn’t been much discussion at the committee level on no-fault auto reform, but Carter said she was confident that there would be a bipartisan effort.

“With the implementation of the law, there were a lot of eruptions around it,” she said. “That doesn’t mean that they may not occur once (auto no-fault) starts surfacing as an issue again, but as of right now, it seems like both sides are willing to come to some type of agreement.”

Senate Majority Leader Winnie Brinks, during a Tuesday interview, said she was proud of the achievements of her caucus in the opening months of the new legislative term, saying she was very satisfied with the rapid movement to achieve several big policy wins in only a few months.

Legislative Democrats, seeking to flex their political muscles with full control of state government for the first time in 40 years, have been busy. Between moving long-time Democratic priorities to the governor’s desk, including a repeal of the state’s right-to-work law, reinstating the prevailing wage, and strengthening firearms statute, the majority leader said she was proud of their initial work.

Ten public acts have been signed this term as of Tuesday, several of which deal with long-sought Democratic policy changes their members have campaigned on in the past and seen little or no action on under Republican control of the state.

Also passing prior to the Legislature’s spring recess was a major tax package, additional protections for LGBT persons in the state from discrimination in employment and public accommodations, changes to the state’s third-grade reading law.

“It’s pretty gratifying for me after serving 10 years in the minority, and get so much done,” Brinks (D-Grand Rapids) said in an interview with Gongwer News Service. “I really feel like … we were deliberative for the most part.”

She explained that Democrats sought to hold committee hearings and have the expected sharp debates over many high-profile items that moved in the opening legislative push.

For items such as the supplemental appropriations bill, PA 1 of 2023, which contains $1.1 billion, Brinks said the Legislature was up against a tight timeline. It included funding for several economic development projects and funding to close the books on the 2021-22 fiscal year. It was the earliest signed public act in a new legislative term since 1947 (See Gongwer Michigan Report, January 31, 2023). A school aid supplemental with funding for the 2021-22 and 2022-23 fiscal years, PA 2 of 2023, was later signed February 14.

Brinks praised the Legislature’s body of work thus far and said: “we’ve done some hard things.”

On its policy agenda thus far, she said having any one of them in a single legislative session would be a huge success.

The items quickly shepherded through the Legislature in a less than three-month sprint to start the new session read like a wish-list of Democratic top priorities.

Gov. Gretchen Whitmer last week signed legislation repealing the state’s decade-old right to work law and reinstating the prevailing wage, making the announcement via press release (See Gongwer Michigan Report, March 24, 2023). Included in the right to work legislation were appropriations, preventing the ability to overturn their actions by referendum.

Whitmer and Democrats, who have on several occasions while Republicans controlled state government protested moves to block the referendum process through attaching appropriations, did the very thing they have opposed by going that route.

“That is something that both parties have complained about in the past,” Brinks said, not shying away from the fact that it was a tool the Democrats had at their disposal.

In 2000, the Michigan Supreme Court held that a bill making appropriations could not be subject to referendum. The 2012 GOP right to work law included appropriations.

Brinks said if both parties want to do away with the referendum proofing of policy items through appropriations, she would be willing to hammer out a compromise.

As to the right to work repeal, she saw a difference in how they approached the issue by having hearings and letting there be a debate. She said Republicans by contrast pushed the 2012 right to work law through during lame-duck session with no input nor hint that it was on the agenda until it was sprung upon the public.

Another key bill that passed was PA 4 of 2023, in which lawmakers increased the amount of retirement benefits retirees can exempt from the income tax, expanded the Earned Income Tax Credit, and put in place for a possible earmark of $500 million per year in Corporate Income Tax revenues to the Strategic Outreach and Attraction Reserve fund for three fiscal years beginning with the 2022-23 fiscal year. It contained $1.34 billion total.

A Democratic proposal to use $800 million and provide taxpayers a $180 rebate check ($90 per taxpayer for married couples) through a shift of General Fund revenues out of the fiscal year 2021-22 surplus would have prevented a possible reduction in the income tax rate.

However, Republicans did not give the bill immediate effect, meaning the bill would not take effect until 91 days after the sine die adjournment of the Legislature. This blocked rebate checks from being issued.

Barring a surprise in the book closing process for the 2021-22 fiscal year, provisions under PA 180 of 2015 could lead to a drop in the income tax rate from 4.25 percent to about 4.05 percent. An announcement on the book closing for fiscal year 2021-22 is expected later this week. Despite the rebate check provisions in the bill that will not take effect, Brinks said there overall “was no concerted effort” to block the potential income tax rate cut from taking effect.

On Tuesday, Attorney General Dana Nessel issued an opinion stating that any income tax rate reduction under the 2015 law due to revenue growth is temporary and only is in effect for one year (see separate story).

Brinks said she was still reviewing the attorney general’s opinion and had no immediate official comment.

Other major policy changes that have been signed by the governor include changing the date for the state’s presidential primary from the second Tuesday in March to the fourth Tuesday in February (PA 2 of 2023); an expansion of the Elliott-Larsen Civil Rights Act to include sexual orientation and gender identity or expression (PA 6 of 2023); and removing the retention requirement provision from the state’s third grade reading law (PA 7 of 2023).

Several bills that would remove the state’s abortion ban language from statute and the associated criminal penalties are closing in on final passage and are close to being sent to the governor’s desk.

Following the mass shooting on the Michigan State University campus February 13, Democrats pushed to quickly introduce previously planned legislation that would require the safe storage of firearms, implement universal background checks for firearm purchases and enable firearms to at least temporarily be taken from individuals deemed to be a danger to themselves or others.

Last week, multiple safe storage and background check bills passed and will soon be on their way to the governor’s desk, with the so-called “red flag” law bills relating to temporary confiscation of firearms bills waiting to be taken up once lawmakers return from the legislative recess.

When the Legislature returns, she said getting the final firearms bills to the governor’s desk will be a priority.

“We’ll certainly be getting right down to business with the budget,” Brinks said of their top area of focus when lawmakers return. “The policy stuff might slow down a bit.”

Providing certainty for schools by having the education budget done by the end of June will be a goal, she said.

Several policy items will be on the Democratic majority’s list of priorities following their return next month. These will likely include bills focused on education and health care along with some environmental issues such as climate change. Implementing the changes passed by voters in Proposal 2022-2 will also be on the agenda, she added.

Brinks said she sees a different pace when members return compared to the rush of activity that marked the first few months.

“We’ll settle into a bit more of a regular cadence,” Brinks said.

Not seasonally adjusted unemployment rates increased in six regions while declining in three and remaining constant in eight, the Department of Technology, Management and Budget said Thursday.
“Labor force levels were up across all regions in February,” Wayne Rourke, labor market information director of the Michigan Center for Data and Analytics, said in a statement. “Changes in regional unemployment rates were mixed over the month.”
Michigan regional unemployment rates ranged from 3.5 to 9.9% in February. Six Michigan regions saw jobless rate increases over the month, with a median increase of 0.3%.
The largest increase occurred in Northeast Lower Michigan (up 0.4%). Conversely, three metro areas saw decreases since January, with a median decline of 0.4%. The most pronounced rate decline was in the Lansing area (down 0.7%).
Michigan’s not seasonally adjusted nonfarm employment rose by 37,000, or 0.9%, over the month, according to the monthly survey of employers. Most of this increase came from job gains in the state’s government sector (up 20,000).
Payroll employment rose in 13 metro areas over the month, with a median increase of 0.6%. The Lansing metro area demonstrated the largest over-the-month job gain (up 3.5%).
Michigan’s total nonfarm employment rose by 92,000 over the year, or 2.2%. All 14 metro areas displayed job advances over the year, with a median employment increase of 2.6%.
On the county level, 44 saw unemployment rate increases over the month, while 22 saw decreases and 17 county rates remained unchanged. Jobless rates rose in 63 Michigan counties over the year.