Michigan State Rep. Lee Chatfield, R-Levering, sponsors a bill to eliminate the state income tax.

DALLAS -- A plan to eliminate Michigan's income tax is headed to the full state House of Representatives for a vote.

The plan approved by the House Tax Policy Committee this week would start by lowering Michigan's personal income tax rate to 3.9 % in 2018 from the current 4.25% but offers no detail on how the revenue will be replaced. About $680 million would be lost in fiscal 2018.

The bill was approved 7-4 along mostly party lines, with two Republicans abstaining.

Republicans control the Michigan legislature, as well as the governor's office, though Gov. Rick Snyder opposes the proposal.

House Bill 4001, sponsored by State Rep. Lee Chatfield, R-Levering, would reduce the income tax rate 0.1 % every year after 2018 until eliminated.

Snyder administration's raised questions over how the state will make up for the lost revenue.

"We have serious concerns about the bill," said Michigan Treasurer Nick Khouri. The bill's prospects in a full House vote or in the Senate were unclear.

According to an analysis from the House Fiscal Agency, the proposal would reduce net income tax revenue by $680 million in Fiscal Year 2018 and $1.12 billion in fiscal 2019. The incremental 0.1 percent personal income tax decreases in subsequent fiscal years would trim revenues by roughly $400 million per year.

Khouri, in testimony before the tax policy committee, pointed to the constitutional requirement that Michigan operate on a balanced budget.

"How are we going to make up the $1.1 billion for the first full year?" Khouri said. "The legislature would either have to raise additional funds to fill that hole or spend far less to make up for it. It's about a 10% hit to the General Fund."

Khouri said that personal income tax represents about 70% of the general fund and 25% of the school aid fund as well as a growing share of transportation funding.

Snyder also voiced his concerns over the consequences of eliminating the income tax.

"I'd reiterate I have serious concerns about this bill," said Snyder. "Republicans in Michigan have made tough choices over the past six years that have led to a tremendous comeback. We are on a very positive path toward our future and we can't afford to take a wrong turn now."

Michigan is facing significant budget pressures over future spending on infrastructure and long-term unfunded retirement obligations.

"We need to focus on areas to support economic growth," said Khouri.

A Snyder-commissioned report issued in December warned that Michigan is underinvesting in infrastructure by about $4 billion per year. Transportation infrastructure accounts for the biggest funding gap. The report shows that the state has an annual investment shortfall of $2.7 billion that will exceed $40 billion over the next 20 years.

Snyder has also formed a task force charged with recommending how to tackle $14 billion in unfunded liabilities in municipal pension and retiree health care plans across more than 330 communities.

"This is a philosophical issue you are either going to be for income tax reform or against it," said State Representative Jim Tedder, R- Clarkston, a supporter.

"Republicans never run out of ideas when it comes to making life more difficult on hardworking middle-class families," said Sam Singh, D-East Lansing, an opponent. "What's worse is pushing a tax plan that will require drastic cuts to our public schools, road funding and local police and firefighters. It's time we retired this sad old playbook and put building a strong middle class first again."

State Sen. Jack Bradenburg, R-Harrison Township, is also is working on legislation to eliminate income taxes.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.