April 7, 2023 | This Week in Government: Income Tax Reduction Only for One Year

The 2015 statute that requires a reduction in the income tax when revenues to the General Fund exceed inflation plus economic growth unintentionally should result in the income tax dropping from 4.25% to 4.05% for 2023 only, with the rate returning to 4.25% in 2024, the Citizens Research Council of Michigan said Tuesday.

The independent, nonpartisan researchers at the CRC agreed with the end result in a recent opinion from Attorney General Dana Nessel but for a different reason.

Republicans, including those in the Legislature and Gov. Rick Snyder, who signed PA 180 of 2015, have fumed Nessel twisted the statutory language of the law to evade a permanent rate rollback. An analysis from the CRC said that while there is no doubt the Legislature intended a permanent rollback in the rate, the statute’s plain language makes rollback one year only, with the rate returning to 4.25%.

The statute’s language declares “except as otherwise provided under subdivision (c), on and after Oct. 1, 2012,” the income tax rate is 4.25%.

Subdivision (c) then reads, “For each tax year beginning on and after Jan. 1, 2023, if the percentage increase in the total general fund/general purpose revenue from the immediately preceding fiscal year is greater than the inflation rate for the same period and the inflation rate is positive, then the current rate shall be reduced….”

The issue, the CRC says, is that unless General Fund revenues rise by more than inflation in the immediately preceding fiscal year – and all forecasts show a decline in General Fund revenues in the current fiscal year – “there’s no longer any need for the annual calculation prescribed in subdivision (c). Effectively, subdivision (c) is now moot since the condition on GF/GP growth exceeding inflation is not met. If you’re the Department of Treasury following the rules of the law next year, you can just stop reading subdivision (c) after the second comma. What the ‘current rate’ represents is no longer even relevant; neither are all the elements of the trigger formula.”

Further, the statute provides no guidance on what should happen if revenues do not rise above the rate of inflation plus growth.

“It doesn’t say ‘maintain the reduced rate’ or ‘go back to the old rate’ or anything else. That takes us back to subdivision (b), which says the rate is to be 4.25% ‘except as otherwise provided in subdivision (c),’” the CRC said. “In our mind, the fairest interpretation of this language is that the income tax rate reverts to 4.25% in any tax year for which the triggering event – annual GF/GP growth exceeding inflation – does not occur. That will most certainly include tax year 2024.”

The CRC, in its blog post, said its interpretation is not a statement about the merits of a permanent cut to the income tax rate and that it’s “abundantly clear” the Legislature did not intend this result.

“We are not attorneys here at the Research Council, so we have no unique expertise in case law regarding the interpretation of statutory language. However, we are most definitely in the business of reading and analyzing Michigan statutes,” the organization said. “A court challenge to the attorney general’s opinion seems more likely than not. But barring some revenue miracle beyond anything we’ve seen during the recent revenue boom, our reading suggests that any litigants will have an uphill battle in convincing a court that the language above implies a permanent tax cut.”

All that said, the CRC said there is “certainly room for argument” in how Nessel concluded the rate rollback is for one year only. Nessel’s opinion relied heavily on what the Legislature meant by “current rate” in the statute. She wrote the dictionary definition meant 4.25% was the current rate at the time the statute was enacted, thus it is the default. The CRC said a “strong argument” can be made that when the calculation on revenues/inflation is made in a year, 4.05% will be the “current rate.”

Nonetheless, the CRC said it concurs the rollback should be for one year only based on the wording of subdivisions (b) and (c) regardless of how a court defines “current rate.”

Detroit’s economic rebound continues, with Moody’s Investors Service upgrading the city’s bond rating and giving it a positive outlook.

The most recent upgrade, from Ba1 to Ba2, follows nine consecutive years of balanced budgets and puts Detroit one step away from Investment Grade status, which it has not had since 2009.

This is the second consecutive year that the city has received a bond rating upgrade. Last year was Detroit’s first upgrade from Moody’s since 2018. The move reflects improving and strengthening the city’s financial position and structural balance. Moody’s cited the city’s ability to manage rising pension costs, the budget, and its continued revenue growth as a reason for the upgrade.

Detroit Mayor Mike Duggan praised the city’s chief financial officer, Jay Rising, and his team for the work they’ve done.

“Going from bankruptcy and state financial oversight to being withing striking distance of an investment grade rating less than 10 years is a tremendous accomplishment,” Duggan said in a statement.

High bond ratings mean that the city can borrow funds to pay for various investments and upgrades at a lower cost. Paying less to borrow funds means that money can instead be used for city services.

“The city is well positioned to manage its rising pensions contributions for at least the next few years,” the Moody’s report said. “The city’s solid budget management and robust revenue growth have enabled it to accumulate resources in a irrevocable trust and increase its available fund balance to levels that are strong compared to peers.”

Rising said the bond upgrade was evidence of Detroit’s fiscal recovery.

“Our goal remains to have an investment grade restored,” he said in a statement. “We believe we’ve earned investment grade credit and will continue our strong fiscal management while carrying out the job and economic growth strategies of the administration in partnership with City Council.”

The report said that Detroit has worked to address structural balance in its financials by easing its pension costs. The city’s bond rating is likely to continue to improve if it is able to continue absorbing pension contributions and manage inflationary cost growth into its budget.

“The city’s economic recovery is real, sustained over several years and likely to continue given the pipeline of downtown development projects and the substantial investments made by automakers in battery and electric vehicle manufacturing in both the city and the region,” the report said.

To continue with rating upgrades, the report recommended that Detroit have prudent deployment of the city’s retiree protection fund and sustained absorption of pension contributions, continued revenue growth, and strengthened full value per capita and median household income.

In a formal opinion from Attorney General Dana Nessel, the Department of Environment, Great Lakes and Energy can require a property where ample amounts of hazardous materials are present to clean up in accordance with standards in state law.

In the opinion to EGLE Acting Director Dan Eichinger, Nessel wrote that a property can constitute as a “facility” and that the owner “must comply with the due care obligations” according to the requirements listed in Section 20107a of Part 201 of the Natural Resources and Environmental Protection Act.

Properties like fruit orchards have used lead arsenate pesticides to control insects in the past, causing lead and arsenic concentrations to exist in the soil at high levels longer than naturally occurring metals. The opinion noted that “the application of pesticides in accordance with label directions and generally accepted agricultural and management practices at the time of the application is not a ‘release’ of a hazardous substance.”

A “release” includes but is not limited to spilling, leaking, injecting, dumping, or disposing of hazardous material. If material is applied according to the label directions and is aligned with accepted agricultural and management practices at the time of the application, this does not constitute as a release, and is instead an “agricultural release exception.”

Not every property is a “facility.” A property would not be deemed a facility if it has satisfied the cleanup criteria, taken corrective action under the Resource Conservation and Recovery Act, received approval from the department for “site-specific criteria,” has hazardous substances present only due to placement or storage in compliance with state law, have split the property from a facility and no longer have hazardous substances present in excessive concentrations or have reduced the concentrations of hazardous substances through natural attenuation.

For properties that are deemed a “facility,” the opinion said the knowing owner or operator may be subject to due care obligations and, therefore must do the following:

• Ensure measures are taken to prevent exacerbation;
• Undertake “response activity,” such as mitigating unacceptable exposure to hazardous materials and mitigating fire and explosion hazards;
• Take precautions against “foreseeable actor or omissions” of a third party as well as consequences;
• Provide cooperation, assistance, and access to those authorized to conduct response activities;
• Comply with any land use or resource use restrictions aligned with response activities; and
• Refrain from impeding the effectiveness or integrity of any land use or resource use restriction at the facility in connection with responsive activities.

Nessel clarified that this does not give individuals authorized to conduct responsive activities “any right of access not expressly authorized by law.”

The attorney general also said that even if a “release exception” is applicable, some obligations under the law are not dependent upon a release occurring.

A new advertising campaign highlighting the state as a place to live, work and play will hit airwaves across the country and state, Gov. Gretchen Whitmer announced Tuesday.

The Michigan Economic Development Corporation is launching a “Pure Opportunity” campaign along with an evolved Pure Michigan campaign seeking to attract businesses and individuals to Michigan.

“Michigan is a place that will drive the world forward through grit, our world-class workforce, and stunning natural resources,” Whitmer said in a statement. “We will work together to show the world what makes Michigan the best place invest, innovate, live and explore. We will continue competing with anyone to bring manufacturing jobs and supply chains home and become known as a state with a strong business climate and unparalleled economic opportunity for workers. Over the last 100 days, we have made record progress to make Michigan the state where you can afford to live, be who you are, and have access to health care. We invite everyone to be a part of what we’re building in Pure Michigan. Let’s keep getting it done.”

The Pure Michigan commercials will invite travelers to “Keep it Fresh,” with ads seeking to inspire visitors to the state. Nationally, three new television commercials – “Fresh Voices”, “Fresh Air”, and “Fresh Path” – will run. The ads will include an original track by Michigan-based, independent music company Assemble Sound and feature the voice of Detroit poet Jessica Care Moore.

The ads will run during the summer on Discovery, Food Network, HGTV and Magnolia Network. Regional efforts will target the state of Michigan, as well as Atlanta, Chicago, Cincinnati, Cleveland, Columbus, Dayton, Fort Wayne, Green Bay, Indianapolis, Louisville, Milwaukee, Minneapolis, South Bend, St. Louis, and Toledo.

The “Pure Opportunity” campaign will also run across TV, digital, connected TV, print, social, search, radio, podcast, and out of home. The campaign touts the state’s skilled labor pool, freshwater resources, and top ranking in Climate Change Preparedness, which set the state apart from much of the country, a statement from the Whitmer Administration says.

“It is impossible to discuss disruption or innovation without mentioning Michigan. Many groundbreaking discoveries, legendary music genres and recreational pastimes were founded here in Michigan. Creative problem-solving and making the impossible possible are elements of who we are in Michigan! Which is why we are once again reminding the nation – and eventually the world – of who we are and what our state continues to offer in a rapidly evolving world,” MEDC CEO Quentin Messer said. “We have a great story and must boldly tell it as Michiganders. So, to all risk-takers, game-changers, trailblazers and believers – we welcome you to build a life, career, business and future that is uniquely your own and about which you can be proud right here in the great state of Michigan.”

The Pure Opportunity attraction campaign includes images from Michigan companies, including Pfizer, Orbion Space Technology, Calumet Electronics, FANUC, and FLO, while images for the in-state efforts include Short’s Brewing Company, Daddy Dough Cookies, and Detroit Denim.

“Michigan is home to an impressive and diverse array of small businesses. In order for these businesses to thrive, it’s imperative that we find solutions that will increase our labor force participation,” said Brian Calley, Small Business Association of Michigan president and CEO. “This Pure Opportunity campaign highlights what makes Michigan a great place to live, work, and play.”

The MEDC is also working to build a national talent attraction campaign into its portfolio of efforts to market the state, expected to launch nationally later this year.

Former House Speaker Rick Johnson and three others have reached plea agreements with the U.S. government in a bribery scandal, the Department of Justice announced Thursday in the largest public corruption scandal to hit state government in 30 years.

Johnson, along with lobbyists Brian Pierce and Vincent Brown, as well as cannabis business executive John Dalaly, each reached plea agreements with federal investigators and are to be formally arraigned and plead guilty at a hearing in the coming weeks, said U.S. Attorney Mark Totten at a Lansing press conference. He spoke outside the federal building in Lansing, where the Capitol could be viewed behind him.

Not since the House Fiscal Agency scandal of 1993, when multiple employees and a state House member were implicated in raiding the agency’s imprest account as their personal piggy bank for nearly $2 million, has such a serious corruption scandal erupted in state government.

The attorney for the Western District, along with FBI Special Agent James Tarasca, explained that Johnson was being charged with accepting bribes, Dalaly for paying those bribes through two of his companies – which are not being charged at the moment and remain anonymous in court filings – while Brown and Pierce are charged with conspiracy to commit bribery.

“The marijuana industry has been likened to a modern-day gold mine, a new frontier where participants can stake their claim,” Totten said. “It’s been held out as an equalizing opportunity by some. And yet what we learned today is that one of its key leaders and those with power and influence around him acted corruptly, and did so at a moment that mattered for those who wanted to get ahead in this industry.”

Johnson accepted more than $100,000 in cash payments and other benefits, Totten said.

“At the heart of this corrupt scheme is defendant Rick Johnson,” he said. “And to be clear, Johnson accepted these bribes corruptly.”

The maximum prison term under the charge Johnson faces is 10 years, Totten said, but he said sentencing will be “a decision for the judge down the road.”

Plea agreements made available on Thursday show that Johnson waived his right to an indictment before a grand jury to instead plead guilty to bribery. His agreement shows that he has admitted to being a state agent who accepted a thing of value from another person, doing so corruptly with the intent to influence transactions and decisions of the board.

The agreement shows that Johnson understands that the penalty for the felony he is charged with carries up to 10 years of imprisonment, three years of supervised release, a fine of $250,000, and a mandatory special assessment of $100. He agreed to pay the assessment at or before his sentencing unless he demonstrates he has the inability to pay.

He agreed to forfeit the $110,200 in bribes he allegedly accepted and to fully cooperate with the investigation, which Totten said was ongoing, which means it is likely others could be charged in the coming months (see separate story). Johnson is said to be assisting with identifying additional funds and assets that could be applied toward the fine and forfeiture of funds.

Johnson also will be required to provide documentation relevant to the investigation and possibly testify before a grand jury and open court proceedings, providing all relevant, tangible evidence.

For his cooperation, Johnson may be able to receive a level two sentence reduction, and the U.S. Attorney’s Office agreed to object only if Johnson is inconsistent with his cooperation as detailed in the agreement. The federal government also agreed to not charge him with additional crimes related to the investigation unless those crimes include some that were not disclosed to prosecutors at the time of the agreement.

While cooperation could help Johnson at sentencing, it is a longstanding protocol that public officials pleading guilty to federal crimes serve some prison time, unlike state courts where first-time offenders often receive probation.

His wife, Janice Johnson, who was not a target of the investigation but had her computer confiscated and examined by investigators, will not be charged in the matter or in connection with Johnson’s acceptance of bribes related to his time on the now-defunct Medical Marihuana Licensing Board under the plea agreement.

Agreements for Brown, Dalaly, and Pierce read along similar lines. Dalaly also faces the penalties stacked against Johnson, while Brown and Pierce, who are expected to plead to conspiracy, face five years of imprisonment with the same applicable fines as their alleged cohorts charged with paying and accepting bribes.

CRIMES TRANSPIRED OVER SEVERAL YEARS: Johnson, days after leaving office in 2005, became a lobbyist with Dodak and Associates, being named a partner with his namesake added to the company to become Dodak Johnson and Associates. He was an early and prominent supporter of former Gov. Rick Snyder in 2009.

In 2015 he began working on the first major legislative changes to the 2008 voter-initiated law legalizing marijuana for medical purposes. Eventually signed into law in 2016, the overhaul created a licensing structure for medical marijuana businesses and products.

He was appointed by Snyder as one of five members on the board that would oversee applications and was also appointed by the former governor as its chair. Johnson sold his shares in Dodak Johnson and terminated his lobbyist registration.

Among the five members of the board, one must be drawn from three nominees submitted by the Senate majority leader, who at the time was Sen. Arlan Meekhof.

For almost two years, Johnson played an integral role in the licensing process for medical marijuana.

Federal investigators in felony information said they believe Johnson accepted the bribes during his nearly two-year stint on the board, in which he was prohibited from having any direct or indirect conflict of interest in any licensee or facility seeking a license from the board.

It is alleged that Johnson provided what was described as valuable nonpublic information about the rules and operations of the board and gave assistance on application matters to three companies ­– identified in the document only as Company A, Company B, and Company C.

Company A and B were operated by Dalaly, while Company C was lobbied for on behalf of Brown and Pierce.

Company A and Company C were seeking operating licenses, while Company B was seeking a license to build a digital cryptocurrency platform for marijuana financial transactions. Company B did not end up seeking a license from the board, Totten said Thursday.

Johnson allegedly used various limited liability companies, including JBJ Ranch, V.M. Enterprises, and Common Cents Harvest Farms, to accept the cash payments. Those payments came from Company A, Company B, Philip Alan Brown Consulting – which was where both Brown and Pierce worked for a time – and Michigan Grower’s Consultants and were funneled to the LLCs to help hide the fact he was receiving the payments while also serving as the chair of the board.

Federal investigators said that a medical marijuana license from the board had a value in excess of $5,000 because it would allow a business to begin the actions necessary to participate in the industry, whether that’s growing, processing, testing, transporting, or selling cannabis in the state.

It is alleged that Johnson, Company A, and Company C failed to disclose their dealings with each other and concealed corrupt payments to entities controlled by Johnson. The two companies are alleged to have falsely stated on applications that they had no financial relationship with Johnson or anyone else on the board.

Between July 2018 and April 2019, around the time when the board was dissolved via an executive order from then-newly elected Gov. Gretchen Whitmer, Johnson is alleged to have voted in favor of approving pre-qualification status for Company A and Company C, as well as voting in favor of approving their operating licenses.

In all, Johnson is alleged to have accepted $110,200. Dalaly is alleged to have paid $68,200 to Johnson’s entities.

Both Brown and Pierce are alleged to have engaged in a conspiracy to use their access to Johnson as a way to obtain more clientele, generate revenue and profits for members of Philip Alan Brown Consulting and Michigan Grower’s Consultants, promoting a relationship with him and ability to reward him for his vote and information on the board.

The pair agreed to make payments to Johnson using client retainer fees.

Felony documents filed with the U.S. District Court for the Western District on Thursday show that the pair paid $2,000 to Johnson on or about June 8, 2017. Some of those funds were used to send $2,000 to JBJ Ranch.

On or about July 27, 2017, the pair paid Johnson $4,000 from an account held by Michigan Grower’s Consultants to an account held by Philip Alan Brown Consulting, using some of those funds to pay $2,000 to JBJ Ranch and another $2,000 to Common Cents Harvest Farms.

The pair again paid Johnson on or about September 11, 2017, moving client payments from a Michigan Grower’s Consultants account to one held by Philip Alan Brown and again paying the funds to Johnson’s JBJ Ranch. Similar transactions to JBJ Ranch occurred on October 5, 2017 ($2,000), December 6, 2017 ($2,000), December 20, 2017 ($3,000) and February 15, 2018 ($4,000).

An attorney for Brown was not available to comment on the matter when asked by Gongwer News Service. A message seeking comment from Johnson’s attorney was not returned at the time of publication.

Ben Gonek, the attorney representing Pierce, said he had no comment when asked why his client had agreed to plead guilty instead of fighting the charges in court, the nature of his cooperation, and whether he expected to do any jail time.

Raymond Cassar, the attorney representing Dalaly, told Gongwer on Thursday he was pleading guilty because he wanted to “step up to the plate right from the get-go.”

“He has been cooperating with the government in this investigation because he believed that that was the right thing to do,” Cassar said. “Dalaly has never been in trouble before. He’s 70 years old and is a good man, but he found himself involved with this and from day one wanted to do the right thing and cooperate.”

As to his cooperation, Cassar said investigators hadn’t asked Dalaly for his testimony before a grand jury or in open court as they have with Johnson.

“In this case, cooperation is just accepting and clarifying the government’s questions as to his personal involvement, that’s basically what it’s been,” he said.

When asked about potential jail time for his client, Cassar said it was up to the judge, but agreed that it did look favorable from the government’s perspective that he, again, stepped up to the proverbial plate and cooperated with the investigation.

“I’m hoping that’s going to go a long way, with both the government and with whoever the judges assigned to on this case,” Cassar added.

Totten, on Thursday, was asked the same question regarding possible prison time for those charged and pleading guilty, saying similarly that it was a matter still being determined and was ultimately a decision for U.S. District Judge Jane Beckering of the Western District of Michigan, assigned to oversee proceedings in USA v. Johnson, et al (USWDM Docket No. 23-00040).

As to whether he expected others to be charged in the investigation, Totten reiterated the investigation was ongoing with assistance from the tetrad charged Thursday and that it would depend on the facts provided in the case.

He also said that investigators were only looking at the time when the board was active between 2017 and 2019 and not afterward, when Whitmer abolished it, noting that it wasn’t relevant to what they were looking at in terms of the corruption uncovered through investigating Johnson and others.