Federal Tax Cut Could Trigger $1.4 Billion Michigan Tax Increase

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By Alex Ebert

The Law of Unintended Consequences has struck Michigan taxpayers, who might be subject to a $1.4 billion tax increase under the new federal tax law.

Michigan economists and state officials say the new law, signed Dec. 22, might trigger an automatic and immense increase in Michigan state income taxes. The tax hike would be triggered because Michigan law grants only those income tax exemptions allowed under federal law, and the new federal tax act eliminated the $4,050 personal exemption.

While economists argue there is ambiguity to the situation, state officials have called on legislators to remedy the problem through a new law ensuring taxes don’t go up for Michiganders. Some, such as Patrick Anderson, principal and CEO of the Lansing, Mich.-based Anderson Economic Group LLC, have argued the state should take an interpretive stance that the federal law doesn’t eliminate the exemption, but only lowers it to $0, allowing Michigan’s $4,000 state exemption to survive.

“More generally, and more importantly, we do not want to leave an ambiguous tax situation open for interpretation by individual state officials or the courts,” Michigan State Treasurer Nick Khouri wrote in a Jan. 3 letter to the Anderson Economic Group. “Addressing uncertainty for taxpayers is a key responsibility of the state Legislature. That is why I believe it is incumbent upon the Legislature to clarify the treatment of personal exemptions for state tax purposes in-light-of recent changes at the federal level.”

Gov. Rick Snyder (R) declined to comment, pending a full review of the 2017 tax act ( Pub. L. No. 115-97) by the Michigan Treasury Department. However, in a previous interview with the Associated Press, Snyder expressed the same view as Khouri, and said legislators will be working on a solution.

What’s the Fix?

State Republican and Democratic leaders didn’t immediately respond to requests for comment. But Michigan legislators won’t be alone in deciding how to adjust their codes in 2018 due to the loss of the personal exemption.

A Tax Foundation analysis found that tax codes in at least 10 states use the federal personal tax exemption. New York City and Illinois also appear to be in a similar situation to Michigan, and might be able to reinterpret their state codes in order to prevent losing their personal tax exemption, according to analysis by the Anderson Economic Group.

“I am not aware of any situation where the effect of federal reform was so unclear,” Jason Horowitz, director of public policy and economic analysis for the Anderson Economic Group told Bloomberg Tax Jan. 5. “We actually don’t think the states that rely on the Internal Revenue Code to provide their exemptions should have an effect here, but I could see a circumstance where this is so ambiguous where different states depending on the law come to different conclusions.”

While some economists have called on Michigan to quickly interpret the law, others believe the state should pump the brakes. States should wait until they have a full understanding of what the federal law will mean for the totality of state revenue, Nicole Keading, an economist with the Tax foundation told Bloomberg Tax Jan. 5. She said many states are going to experience sundry changes due to state code conformity with different parts of federal law.

“I would encourage Michigan to consider all of the revenue impacts before making specific changes. The state could see some revenue increases on the corporate side, the net interest deduction and treatment of net operating losses,” she said. “There’s a chance there could be even more revenue than the loss of the personal exemption in the state.”

The Michigan legislature reconvenes Jan. 10.

To contact the reporter on this story: Alex Ebert in Columbus, Ohio at aebert@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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