How to Lose Elections and Still Cut Taxes

Republicans in Michigan looked to be facing a bleak future after losing control of the state House, Senate, and governorship last year. Yet even with Democrats in control, quirky state laws could end up handing the GOP a long-sought priority: Cuts to Michigan’s state income tax.

With their once-in-40-year majorities, Michigan Democrats have been pursuing tax reform ideas that Republicans typically support wholeheartedly, including an expansion of the state’s Earned Income Tax Credit and a phaseout of pension taxes. But Democrats have also coalesced around a budget gimmick that would send one-time $180 rebate checks to every Michigan taxfiler. That’s what prompted pushback from Republicans: Instead of rebate checks, they have their sights set on leveraging a 2015 trigger law to reduce the state’s flat income tax—and achieving the other tax reforms.

Three factors have shaped the odd tax debate: the income tax trigger, a state constitutional provision requiring two-thirds majorities for a law to take “immediate effect,” and a budget surplus padded by an increase in tax revenue due to federal stimulus money and inflation.

Under the 2015 law, negotiated as part of a transportation funding deal when Republicans controlled the legislature and governor’s mansion, the state income tax is set to be reduced proportionately each year from 2023 onward in which general fund revenue growth exceeds inflation. At the time, those conditions looked unlikely to arrive any time soon. “No one ever really thought this would become a reality,” onetime GOP consultant John Helmholdt recalled of the measure.

But thanks to the cumulative effects of the various COVID stimulus bills that indirectly increased the state’s surplus via increased tax revenue, the trigger has now come swiftly: Federal stimulus checks increased consumer spending and generated more state sales tax revenue.

The income tax rollback looks likely to be triggered when the fiscal year ends on June 30—that is, unless Democrats succeed in their plan to circumvent the trigger. The party is using what the news website Bridge Michigan described as “accounting maneuvers” to redirect $800 million in revenue from corporate income taxes straight into the one-time $180 rebate checks, bypassing the “general fund” bucket so that the rollback threshold isn’t triggered after all.

Democratic unity against the income tax cut is a recent phenomenon: Last month, state Rep. Angela Witwer—chair of the House Appropriations Committee—seemed to suggest that blocking the rollback would be “political suicide.” But Gov. Gretchen Whitmer included it in her plan anyway, perhaps seeking to avoid a cut that could end up shrinking the size of the general fund in the long run.

Although Republicans support other provisions in the package—such as an expansion of the state’s Earned Income Tax Credit (EITC) and a phaseout of pension taxes—they oppose these moves. A narrower bill focused on those measures “could have been done in a bipartisan way and signed into law weeks ago,” Senate Minority Leader Aric Nesbitt said.

Restaurant owner and former GOP state Rep. Tommy Brann said he supports the EITC expansion but wishes Democrats would agree to the income tax rollback—“the gift that keeps on giving”—rather than turning to one-time rebate checks, which he characterized as a “quick fix” that would be less helpful long-term for people like his restaurant’s cooks.

He may get his wish. Republicans can’t stop the Democratic majority from passing bills, and both chambers of the state legislature have already approved Whitmer’s gambit. But there’s a twist: the Michigan Constitution dictates that laws can take “immediate effect” only if they are passed with two-thirds majorities—otherwise, implementation is delayed until 90 days after the end of the legislative session, by which point the fiscal year will be over and the income tax rollback triggered.

If as many as six Republican senators cross the aisle to give the bill immediate effect before April 18, the rebate checks will go out and the income tax rate will hold steady. If they remain opposed, the rebates are dead, and the tax rollback kicks in instead—while keeping the other tax reforms intact.

For some, the choice is easy. Despite being in the minority, Republicans have the chance to achieve a policy victory by doing nothing. “Go talk to a Republican: They have a chance to cut the income tax, they’re gonna cut the income tax,” an experienced GOP state Senate staffer told The Dispatch.

But that approach isn’t without risk. To get it done, Republicans will be on the record as voting against a bill with popular, bipartisan measures in addition to Democrats’ rebate checks—“no” votes that will likely feature in Democratic campaign ads in 2024.

But for now, they remain staunchly opposed. “In order for the rebate checks to happen and the income tax cut to be stopped, Democrats need Republican votes in the Senate to give it immediate effect,” the GOP Senate staffer said. “And Republicans will never give them those votes.”