LANSING (AP) - Michigan's income tax rate would drop from 4.25 percent to 3.9 percent within three years under a plan approved by a legislative committee on Wednesday, the first move in a likely months-long debate over how best to return some of a budget surplus to residents.
Legislation headed to the Republican-controlled Senate would reduce the rate by a tenth of a percentage point each year starting in 2014, followed by a half-percentage point cut in 2017. Taxpayers could save $371 million in the next budget year and $873 million the year the reduction is fully phased in, said the nonpartisan Senate Fiscal Agency.
That equates to about $82 on average per tax return next fiscal year, or $194 in 2017-2018, according to an Associated Press analysis.
All five Republicans on the Senate Finance Committee voted for the bill, saying the economy does better when more money is in taxpayers' hands and that people deserve a refund. Two Democrats opposed it by contending that income tax cuts have no discernible impact on economic growth, questioning the harm to government services and calling the plan "modest" compared with higher taxes that the GOP imposed on many individuals a few years ago.
A surplus carrying over from last year and higher amounts expected to come in this budget year and next total nearly $1 billion, though Gov. Rick Snyder's administration cautions it mostly is a temporary boost in revenues, not an ongoing one.
The Republican governor supports providing some tax relief this year and is expected to propose a plan in his budget presentation next week. In his recent State of the State address, he mentioned helping "hard-working folk" who are "worried about their bills."
GOP legislative leaders may support an income tax cut but have been open to other ideas as well.
Possibilities include sending taxpayers a rebate or upping their personal exemption against the income tax. Democrats also have unsuccessfully pushed to reinstate a tax exemption for retirement income and to restore credits for low-income earners, children and homeowners - changes Republicans approved to offset most of a business tax cut.
"We have a moral obligation to return dollars to the tax-paying public at every opportunity," said Sen. Dave Robertson, a Republican from Genesee County's Grand Blanc Township who voted to move the legislation to the Senate.
But Sen. Steve Bieda, a Warren Democrat, said a typical family of three owed $1,400-plus more in taxes following the elimination or reduction of various credits. The legislation would save the same family $128, or about $10 a month, he said.
"I can't see much economic activity off of that," Bieda said.
The income tax rate dipped from 4.35 percent to 4.25 percent in 2012. It had been increased in 2007 under a budget-balancing deal and was scheduled to drop back to 3.9 percent by late 2015.
However, when Snyder took office three years ago, he and fellow Republicans did not let the income tax rate drop as much as planned as part of their business tax changes.
Conservative groups testified in support of the bill, noting that nine states have no income taxes at all. Organizations representing K-12 schools, local governments and teachers' unions opposed it, fearing a long-term tax cut would lock in past funding cuts they have sustained.
Also Wednesday, some House Republicans introduced bills that would gradually reduce the income tax rate to 4.05 percent by 2016. Starting in 2017, the rate would automatically drop a tenth of a percentage point each year income tax revenue increases $300 million or more.