State lawmakers working on tax fix

TRAVERSE CITY -- A tax cut is always good news, unless it blanks out an exemption elsewhere.

That's what happened when federal lawmakers passed a massive overhaul of federal income taxes. State Treasury Department spokesman Ron Leix said the change eliminated an exemption as part of raising the standard deduction.

But state tax forms ask filers how many exemptions they claimed on their federal returns to determine how many they can claim when filing their state taxes, Leix said. That number would be zero as of 2019 -- the change won't impact taxes due in April.

"The state income tax return is connected to the federal income tax in regards to exemptions," he said.

The exemptions allow people to shave $4,000 from their taxable income when calculating what they owe on taxes, according to information from the state Treasury Department.

Leaving state tax laws untouched would give the state a $1.5 billion windfall thanks to the zeroed-out exemption, Leix said. A family of four with a $55,000 income would see a roughly $680 hit on their tax bill.

Seniors wouldn't see as substantial an impact, depending on their age, said Cynthia Glines, a local coordinator for AARP Tax-Aide. She and other volunteers help senior citizens fill out tax returns at the Senior Center in Traverse City and other locations.

Most people born before 1946 with low to moderate incomes have other deductions they can use that would dampen the impact, Glines said. Those who draw on Social Security with no other income wouldn't be affected at all -- they don't have to file unless they're claiming a property tax or home heating tax credit.

"The later you were born, probably the more you're going to be affected," she said. "But I'll be very surprised if they don't find some way to figure this out or correct this."

It's increasingly likely lawmakers will adopt a fix in time.

State Sen. Wayne Schmidt, R-Traverse City, said he supports a bill state Senators passed that would reinstate the personal exemption and increase it from its current $4,000 rate to $4,700 by 2021. He also added an amendment ensuring the state School Aid Fund wouldn't be impacted by increasing the personal exemption.

Senators are poised to vote on other tax relief, including a tax credit for caring for children 12 and younger or those with physical or mental disabilities, Schmidt said. The increased personal exemption and tax credit combined could leave that same family of four with an extra $600 come tax time.

The bills have proven to be widely popular, Schmidt said.

"All the fighting that goes on, yeah we duke it out on different issues and such, but I think the caucus of the sane and rational prevailed, and we all got together and did some good things," he said.

There is one outstanding issue. State Rep. Larry Inman, R-Williamsburg, said he expects to vote on the reinstated personal exemption next week. But the state Senate, state House of Representatives and Gov. Rick Snyder's office all have differing ideas as to what the exemption should be.

The difference isn't huge, Inman said -- House lawmakers want the exemption to grow to $4,800, and the governor wants $4,500. And everyone agrees the exemption should stay.

"Everybody understands the necessity of doing this," he said. "It's just a question of how much over $4,000 do we do in the tax code for 2020?"

The debate comes after state lawmakers took the rare step of overriding a governor's veto. Snyder rejected a bill that would cut the sales tax for vehicle sales where the buyer trades in their old car, the Associated Press reports.

Senators voted unanimously to bypass the governor, and House representatives voted 85-23 -- Inman said he supported the override.

The bill speeds up a previously adopted phase-in for how much a vehicle or RV buyer can deduct from their taxes, according to the AP. Snyder cited concerns about the financial impact when sending it back to lawmakers.

Inman called the previous arrangement double taxation, and said the new law could bolster auto sales.

But these tax relief bills may impact state spending on infrastructure and other needs.

Schmidt said he doesn't think the bills would have a major impact, and will force lawmakers to focus on spending.

"It heightens that awareness and makes sure we're as focused as we can be here at the state government, which is important," he said. "We shouldn't be spending money willy-nilly whether we have it or not."

Inman said lawmakers will have to look at how the tax cuts impact a commitment they made to spend $600 million in general fund dollars on better roads in 2020 and each year after.

Falling short would be tantamount to breaking a promise, Inman said. Lawmakers must carefully watch how the tax cuts impact state revenues and budget carefully through 2020 and beyond.

The tax cuts could bolster more consumer spending, leading to more sales tax revenue, Inman said. A growing economy could help the state's finances as well.

"If it doesn't happen, then we're going to be faced with making some cuts by year 2020 if we're going to maintain that promise," he said.

Visit The Record-Eagle (Traverse City, Mich.) at record-eagle.com

Distributed by Tribune Content Agency, LLC.