Without a legislative fix, new federal tax bill could mean paying higher state income taxes

Jan 4, 2018
Originally published on January 4, 2018 12:15 pm

The new federal tax bill could mean lower federal taxes, but Governor Snyder and some economists say that it could lead to higher state income taxes.

That’s stirring up fresh talk in Lansing about cutting Michigan’s personal income tax to cushion the effects of the federal tax reform.

Jeff Guilfoyle joined Stateside today to explain. He’s a vice president with Public Sector Consultants and has a doctorate in economics from Michigan State University. He’s also former director of the Office of Revenue and Tax Analysis in the Michigan Department of Treasury.

Listen to the full conversation above, or read a transcript of the beginning of the conversation below.

CYNTHIA CANTY: So Governor Snyder told the Associated Press that the federal tax overhaul means Michiganders will end up having to pay more to the state.

Before we get into whether that's a correct assessment, how did that conclusion arise?

JEFF GUILFOYLE: On your state tax return, you get to subtract exemptions before you calculate your tax. So for every person living in your household, basically, you get to subtract $4,000 from your income before you calculate your tax.

But the way the state law reads is you get to claim the same number of exemptions as you claim on your federal return. Well, the federal law change basically made that subtraction go away. And so the question is whether that carries through to the state. And if it does, it’s a big tax increase in Michigan.

CANTY: Yes, let’s talk about that: So if an individual could lose a $4,000 deduction from taxable income, what could that mean then in an actual hike in state taxes?

GUILFOYLE: So, $4,000 a person, and at the current tax rate of 4.25%, that’s about $170 dollars. So for every person living in your household that qualifies as an exemption, your taxes would go up by $170 a year.

CANTY: So for a family of four, we could be looking at $680 higher.

GUILFOYLE: Yes, so talking about real money here.

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CANTY: Yeah, real money. So, is this something, Jeff, that we’re certain will happen?

GUILFOYLE: A couple people have raised questions about whether or not the federal change actually will impact Michigan. And Treasury has said that they’re still looking at the issue, which suggests that it’s not completely cut and dried.

I think part of the issue is that they left some of the language for the personal exemption in at the federal level, but basically made the exemption go to zero. So whether or not that translates into Michigan is kind of an open question that people are still looking at.

CANTY: Why is this the case? Why is this not clear?

GUILFOYLE: Unfortunately, a lot of stuff, when you look at taxes, is subject to interpretation. So, I think what you end up having is attorneys reading the Internal Revenue Code and trying to decide how that compares to what we have in Michigan tax law and what it really means. I mean, this stuff is just never straightforward.

CANTY: Did some of this maybe slip through because of just the hasty way it was drawn up?

GUILFOYLE: No, I really don’t think it has anything to do with how the feds did what they do. The issue just is that in Michigan, our income tax sort of piggybacks off of the federal tax in a lot of ways. So we use a lot of the federal definitions. Our income that we start with when we’re calculating taxes starts with federal adjusted growth income from your federal return. And so what ends up happening is anytime they make changes at the federal level to the federal law, those changes can end up trickling through to Michigan taxes. And so you sort of have to wait until the feds are done and then look and see what the implications of any changes they made were on Michigan’s taxes.

CANTY: If we lose that $4,000 exemption – the state exemption – for every federal personal exemption, it could mean a $1.4 billion tax windfall for Lansing. And now we have the governor saying we ought to give that back to taxpayers, and that’s sparking new debate over cutting the state personal income tax. We saw House Speaker Tom Leonard push hard last year to roll them back even as the governor opposed it. And it failed. Why did it fail?

GUILFOYLE: Michigan’s budget is really tight at the moment. And there are a lot of provisions that are coming online in the next couple years that are going to keep the budget tight – particularly the diversion of some of the income tax money to help pay for roads, some of the payments related to the Medicaid expansion under the Affordable Care Act. So there’s not a lot of extra room in the budget.

That said, it’s a big difference between saying that you’re going to cut Michigan taxes and then saying that you’re going to allow Michigan taxes to go up by $1.4 billion. $1.4 billion is a big tax increase. I mean that’s a $140 per capita, and so I think it’s probably safe to assume that it’s very unlikely that if Treasury concludes that this is going to be a tax increase that the legislature won’t go in and try to undo it.

CANTY: So we’ll see this effect energize the tax cutters in the state Legislature.

GUILFOYLE: Yes. And I think you could even argue that it’s not necessarily cutting taxes, you’re just sort of putting things back to the status quo and sort of correcting an unanticipated consequence of the federal change.

For the full interview, listen above.

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